Some tax law changes are on the way for real estate at the beginning of the year. Many of them will affect not just investors, but could affect homeowners as well.
Prior to making real estate decisions, it might be good to check out these three tax rule changes.
Capital gains are going up.
Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, commonly referred to as the “Bush tax cuts,” capital gains were capped at 15 percent. The cap has been extended, but is set to expire on Dec. 31. Assuming the tax cuts aren’t extended, then capital gains will rise to 20 percent.
If you sell your home after that deadline, then any gain tax will increase to this amount.
There are some exceptions, for example, if you live in your primary residence for at least two years, then you can exclude the gains up to $250,000 or $500,000 if married filing jointly.
Real estate investors, however, are up against a full increase to 20 percent, no matter their amount of gain.
New 3.8 percent real estate tax will be added.
Some have thought this was a Facebook hoax.
But, no, it’s for real.
Under the Patient Protection and Affordable Care Act, which is commonly referred to as “ObamaCare,” there is an additional 3.8 percent tax on real estate gains. This tax kicks in where the capital gains, from above, leaves off. It has the same threshold requirements as the 20 percent capital gains, but in effect, raises the capital gains tax to 23.8 percent. It only applies to individuals making over $200,000 in adjusted gross income, or $250,000 if you’re married filing jointly.
This limit is not indexed for inflation, so it will apply to more and more people as inflation raises income levels.
Estate tax is going up.
Under the existing “Bush tax cuts,” estate tax doesn’t kick in until the value of the estate reaches $5 million. The amount of the estate valued over $5 million is subjected to a 35 percent tax.
While this level hasn’t affected many Americans, the change coming in 2013 could.
If the tax cuts aren’t extended, then the break point becomes $1 million.
By the way, this not only includes real estate value, but also life insurance value.
So, this tax could easily affect the middle class. Any estate value over $1 million would be taxed at 55 percent.
The good news.
There is some good news, albeit painful. Capital gains are based on the adjusted basis when the property was purchased. In the case of estate tax, the basis is calculated upon the real estate value at the time of death, except for a 2010 death, which saw no “death tax” at all.
Because of decreased values in real estate, many sellers are selling for a lower value than their adjusted basis; thus, resulting in little gain, or sometimes a loss. At least that’s good news on the tax front.
These are a few tax laws that could affect decisions we all make in the upcoming years.
In reviewing upcoming changes, Tim Cagle, owner and CPA with Tim Cagle and Associates in Milton, says, “With the changing environment of the tax code, the need for wise tax planning will be imperative in order to maximize the return on your real estate investments.”
Brian Patton, CCIM is a commercial real estate broker, author and speaker on real estate issues. He can be reached at 770-634-4848. Information in this article may be inaccurate at the time of printing, should not be considered tax advice and individuals should consult a tax professional.