B — April 12 - 25, 2013 — New Jersey — Mid Atlantic Real Estate Journal
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By Stuart Berger, CPA, Sax Macy Fromm & Co. PC Tax implications of Obama Care for RE professionals
B
y now, most people are aware of the increase in tax rates for individu-
real estate. The taxpayer’s level of activity in each entity has a dramatic impact on the determination of income subject to this tax, be- cause this tax is not imposed on any income that is considered to come from “self-employment.”As a result, the ability to aggregate activities and the opportunity to be considered a “real estate pro- fessional” have become critical issues in tax planning. The wide spread use of the multi-tiered business model caused the IRS in late 2012 to issue proposed regulations that address the fairness of the net investment income tax in these situations. I will not even attempt to provide the details of approximately 160 pages of regulations, however I would like to provide some thoughts re- garding one of the most common organizational structures we encounter: The situation where a business entity leases its prop- erty from a related entity. While the debate about the proposed regulations continues, many tax professionals are recommending that such lease arrangements for self-rented properties be restructured from a triple net lease basis to a lease
requiring the related landlord to provide services to the tenant entity. A triple net lease is one in which all expenses are secured by the tenant and the “landlord” activity is limited to collecting rental income. The question here is how much activity is required by the landlord in order for him or her to be in a “trade or busi- ness” thus eliminating the 3.8% tax. Obviously, the more activity there is, the better position the landlord is in. The economics of the lease arrangement may need to be adjusted for the changes required. Unfortunately, at this time the proposed regulations raise more questions than answers. Taxes are often a very complex matter and should be considered in making investment and busi- ness decisions. The way deals are structured can have im- mense impact on tax liabilities. My intent in writing this article is to highlight this new tax and urge you to meet with your tax advisor to fully understand the impact on your particular situ- ation. Stuart Berger, CPA, is a principal in the Real Estate Industry Service Grp. of Sax Macy Fromm & Co. PC. n
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als to 39.6% for taxable in- come in excess of $400,000 and $450,000 in the case of married tax- payers filing a joint return. However, less
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Stuart Berger
attention has been paid to the new 3.8% tax on net investment income and its potential impact on real estate professionals. This tax has been referred to by many as “Obama Care Tax” or the “Medicare Tax” but is officially titled “The Net Investment In- come Tax.” This tax is imposed on the lesser of the individual’s net investment income or modi- fied adjusted gross income in excess of $200,000 for a single taxpayer on $250,000 in the case of a married couple filing a joint income tax return. Why is that important? Many business owners have their business interests split into two or more separate entities. It is also extremely common to have an operating entity and a different entity that owns the
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