NEW 3.8 PERCENT NET INVESTMENT INCOME TAX - EFFECTIVE JANUARY 1, 2013

The Affordable Care Act enacted on March 23, 2010, colloquially known as "Obamacare," is funded, in part, through new taxes and tax increases that start in 2013. 

The most talked about new tax in real estate circles is the 3.8 Percent Net Investment Income Tax (NII Tax).  NII Tax applies to individuals, estates and trusts that have "Net Investment Income" and adjusted modified gross incomes above certain statutory threshold amounts.  "Net Investment Income" generally includes all income derived from investments and passive activities, including, without limitation, interest, dividends, capital gains, and rental and royalty income. The thresholds for single taxpayers and married taxpayers filing jointly are modified adjusted gross income over $200,000 and $250,000, respectively.

For an individual taxpayer who has modified adjusted gross income above the threshold summarized above, NII Tax is based on the lessor of the taxpayer's modified adjusted gross income exceeding the threshold or the taxpayer's Net Investment Income.  For example, for a single filer who has $170,000 in wages and $70,000 in Net Investment Income from the sale of real property (other than a personal residence), NII Tax will apply to $40,000 of income (i.e., the amount by which the taxpayer's income exceeds $200,000), rather than the whole amount of the Net Investment Income (i.e., $70,000).

Homeowners will be encourage to know that NII Tax does not apply to gain on the sale of a personal residence to the extent that the gain is exclude from gross income under IRC section 121, which excludes the first $250,000 ($500,000 for married taxpayers) of gain recognized on the sale.

Posted By:  Brent W. Houston, Esq.