Mid Atlantic Real Estate Journal — Fall Preview — September 28 - October 11, 2012 — 11B
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T ax S ervices
ow that the Supreme Court has upheld the Patient Protection and By Robert Demmett, WithumSmith + Brown, PC Effects of new Medicare tax on real estate investors and their income N investments will be subjected to this tax. The statute includes in the categories of income. Therefore, in determining net investment income rent payer who earns $500,000 of salary and owns a rental prop- erty that generates $30,000 of
loss from the rental property will reduce the net investment income. In addition to those inves- tors who directly own the real estate investment, the new Medicare tax will also apply to those investors who own real estate through partnership or limited liability companies. For instance, a limited liabil- ity company passes net rental income of $25,000 to one of its members. This net rental income will be included in net investment income in comput- ing the 3.8% Medicare Tax. continued on page 12B
Af f o r dab l e CareAct, it is time to focus on the vari- ous revenue raising provi- sions in the act. The act includes two new taxes
The concept of imposing a Medicare tax on earned income has been around for many years and, in effect, this new .9% tax is just a rate increase on high income taxpayers. However, the second new tax is imposed on income items that were historically exempt from Medicare tax.
Robert Demmett
definition of investment in- come interest, dividends, rents and income from passive ac- tivities. Investment income may be reduced by deductions attributable to any of these
is included. Since the statute allows related deductions to offset the income, the amount of net rent is included in net investment income. For example, a married tax-
net rental income will be sub- ject to the Medicare tax of 3.8% on the $30,000 of net rental income, or $1,140. Of course, if the rental property gener- ated a net loss, then the net
that will raise money for the Medicare Trust Fund that is part of the Social Security System. The revenue raised by these new taxes will be used to stabilize the Medicare Trust Fund. The first tax is imposed on earned income in excess of $200,000 for single taxpayers or $250,000 for married tax- payers. The amount of earned income that exceeds these thresholds will be subject to a Medicare tax of .9%. This tax is in addition to the 1.45% Medi- care tax that is imposed tax- payers on all earned income. The concept of imposing a Medicare tax on earned income has been around for many years and, in effect, this new .9% tax is just a rate increase on high income taxpayers. However, the second new tax is imposed on income items that were historically exempt from Medicare tax. Starting in 2013, Internal Revenue Code Section 1411 provides a Medicare tax of 3.8% on net investment income. This is the first time that investment income has been subjected to a separate Medicare tax. As you will see, this tax will impact real estate investors. What we know about Medicare Tax on investment income The Medicare tax equals 3.8% multiplied by the lower of the following: • Net investment income; or • The excess of the modified adjusted gross income over the threshold amount. The threshold amount is $200,000 for single taxpay- ers and $250,000 for mar- ried taxpayers. In addition to individual taxpayers, trusts and estates are subject to this tax. The threshold amount for trusts and estates will be ap- proximately $12,000. What does all of this mean to the real estate investor? Generally, it means that net rental income from real estate
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