A — December 7 - 20, 2012 — Mid Atlantic Real Estate Journal
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eginning with the 2013 tax year, individuals invested in real es- By Karen A. Schirmacher, CPA, MST, Wilkin & Guttenplan PC The impact of the new 3.8% Medicare Tax on RE “Investors” versus RE “Professionals” dividends, capital gains, rental and other passive income Real estate investors with payers and $250,000 for mar- ried taxpayers) may see the new tax imposed on their net
the new law. The new tax is equal to 3.8% of the lesser of (a) net investment income or, (b) the excess of modified ad- justed gross income over the threshold amount. While the tax applies to the net rental income of real estate “inves- tors”, as the law is currently written, it does not apply to the net rental income of real estate “professionals”. A real estate professional is an individual who 1) spends more than 750 hours working in real property trades or busi- nesses; and 2) spends more than 50% of their total work-
ing hours including their other professions) in real property trades or businesses. Addi- tionally, in order for the hours spent in any activity to count towards the satisfaction of both these tests, the individual must meet a time sensitive material participation stan- dard for each separate activ- ity, otherwise the hours are ignored. Individuals owning multiple rental properties may find it virtually impossible to meet the real estate profes- sional requirements. While it’s unfair that an individual who spends all of their time working in rental real estate is subject to the new Medicare tax, relief could come in the form of a tax elec- tion to aggregate all rental real estate activities into a single activity. If the material participation standard is met with regards to the aggregated activity, it is likely that the individual will qualify as a real estate professional and thus not have their net rental income subjected to the 3.8% Medicare tax. The election is made by at- taching a specific statement to the first tax return in which you qualify as a real estate professional. Without the elec- tion, rental income and losses will continue to be treated as passive and not only subject to the strict passive activity rules, but the new Medicare tax as well. While the benefits of making this election are clearly evident more so now than ever, there are disadvantages that need to be considered as well. If you are planning on disposing of one or more of your properties, careful consideration must be given to whether the election should be made prior to the disposition particularly if it is likely that you will realize a loss. Making the aggregation election prior to the disposition could delay the recognition of any tax benefits resulting from the loss for many years. Your professional tax ad- viser can help you navigate these complex rules as well as analyze the costs and benefits to the election and provide you with guidance as to the docu- mentation you should keep to support your status as a real estate professional. Karen A. Schirmacher, CPA, MST is a principal with Wilkin & Guttenplan PC. n
tate may see their tax bill increase as a result of the n e w 3 . 8 % M e d i c a r e tax. This new tax will be imposed on income that was histori- cally exempt
While it’s unfair that an individual who spends all of their time working in rental real estate is subject to the newMedicare tax, relief could come in the form of a tax election to aggregate all rental real estate activities into a single activity.
Karen A. Schirmacher
from the Medicare tax – net investment income. Invest- ment income includes interest,
income over a certain thresh- old ($200,000 for single tax-
rental income, as it is consid- ered investment income under
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