Many of our clients and investors have asked about the effect of the Medical Surtax that is to go into effect as a part of the 2011 Healthcare Reform (Obamacare). There has been a lot of misinformation out there regarding this legislation, so we wanted to clarify what this means to real estate investors and homeowners alike.
The Medical Surtax is an additional tax on investment income, which would include net rental income and capital gains from the sale of a property.
This tax is scheduled to begin in 2013 and only applies to net investment income if your modified Adjusted Gross Income (AGI) is over $250,000 if married; $125,000 if single.
This tax reduces the benefit of capital gains taxes. Potentially capital gains could be taxed at 15% Federal + State Capital Gains Tax (5% in Alabama) + 3.8% Medical Surtax. For Alabama residents, this would increase your capital gains tax from 20% in 2012 to 23.8% in 2013. NOTE: This does not include any potential increases in the federal capital gains taxes, if the Bush-era tax cuts are not extended.
There has also been a lot of misinformation that this applies to the sale of your home. It does apply to selling your house, but only if your gain on sale of home is taxable (greater than $500,000 if married, $250,000 if single). In today’s economy and with the housing market continuing to struggle, this provision will not apply to the vast majority of homeowners.
The National Association of Realtors put together some additional information regarding this impending tax law:
This additional 3.8% tax coupled with the uncertainty surrounding federal capital gains tax rates for 2013 and beyond, has led to a tremendous amount of activity prior to the end of the year. Sellers are eager to close transactions prior to the end of the year and realize a sale before tax rates increase. We even had an owner of a local title company mention that this December may very well be their best on record, due to the amount of transactions occurring prior to 12/31/12.