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Real Estate Agent Tax Advice

Real Estate Agent Tax Advice

Real estate agent tax advice in 2014 will include a new complicated formula on high end home sales.

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts. In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income.

 This 3.8% tax is on investment income for “high earners.” The tax which went into effect in 2013 will be dedicated to the Medicare Trust Fund. “High earners” are defined as individuals whose gross income is $200,000 or more, or married couples filing jointly with a combined gross income of $250,000 or more. The tax doesn’t apply to the first $250,000 of unearned income for individual taxpayers (or $500,000 for married couples filing jointly).

While this Medicare tax will be applied to households with an adjusted gross income of $200,000 or more for individuals, or $250,000 or more for married couples, it typically won’t include capital gains resulting from the sale of a home, providing that home is a primary residence and not a vacation or rental home. The capital gains tax exclusion rule for sales of a primary home — $250,000 for individuals and $500,000 for couples — will remain. Given that most taxpayers make less than $200,000 per year and most home sales don’t clear profits exceeding $200,000, the vast majority of Americans won’t be subject to this tax.

But, for real estate agents that represent high earners knowing about this tax can help you advise your clients accordingly. When a home is sold (that is used for investment purposes), profits over the first $500,000 are subject to a capital gains tax those profits also include an additional 3.8 percent tax that helps fund Obamacare.The National Association of Realtors posted a “myth buster” kind of document on its website to refute the misidentification about the additional tax, although the bill does impose the 3.8 percent tax on high-income taxpayers.

For example, June purchased an investment property for $900,000. During her period of ownership, she takes $230,000 in depreciation deductions. She has made some improvements to the property. At the time of sale, her adjusted basis in the property in $760,000. She subsequently sells the property for $1.2 million. In the year of sale, she is single and reports self-employment income of $315,000. June will owe an additional $25,460 in taxes (3.8% of $670,000 capital gain).

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My blog posts are NOT LEGAL ADVICE. They are for informational purposes only. Actual legal advice can only be provided after you have signed an engagement letter. This information does not create an attorney client relationship. Without attorney client privilege you could divulge information that can hurt your legal rights in the future. I can answer your tax questions in person in Miami and West Palm Beach Florida.