Everything A Real Estate Investor Should Know About The New 2013 Tax Laws

A good real estate attorney should be able to advise a client on the tax implications of the real estate transaction.

Here is a brief summary to changes in the Capital Gains rate, reflected in the new tax law passed in February 2013. Capital Gains is the profit on the sale of real estate.  Profit is defined as the difference between the purchase price and net sale price after deducting closing costs. (Commission, taxes and attorneys fees, etc). Capital improvement may also be deducted to reduce the net gains on the property.

For years, until the new tax law that was enacted in February, the tax on capital gains was 15%. This tax rate was fixed for all taxpayers and was not dependent on the adjusted gross income of the seller. Now,  under the new law, there are three (3) capital gains rates:  0%, 15% and 20%. Individuals whose income is less than $36,250.00, pay 0% (zero) on capital gains [couples filing jointly, the cap is $72,500.00].  Individuals whose income is between $36,250-$400,000 continue to pay 15% capital gains [Jointly $72,501-$450,000]. Individuals whose income is over $400,000 [Jointly over $450,000] pay 20%.

But, that is not all you pay. There are two additional surtaxes that could (and will likely) increase the capital gains to 24.8%

If an individual has an adjusted gross income of over $200,000 [$250,000 filing jointly]. There is an additional medicare surtax of 3.8%. This tax only applies to “investment income”  and not to the sale of a primary residence. Additionally, if an individual has an adjusted gross income of over $250,000, [$300,001 filing jointly] there is a 1% Pease tax on top of the other two taxes.

The adjusted gross income which includes regular salary and earnings of the individual will also include the one-time income from the sale of real property. Thus, if the individual is selling any appreciated property, it will be likely, at least in NYC, that they will be subject to the higher capital gains rates.

The good news is that individuals and couples selling their primary residence will still be able to take advantage of the personal property exemption of $250,000 ($500,000 filing jointly) when calculating their capital gains tax.

The bottom line is, if a seller has a gain of more than $400,000, his capital gains tax could be as high as 24.8% up from 15%. Remember, this is the increase that was only going to impact millionaires.

If the property being sold is not a primary residence, and the seller may be interested in reinvesting the proceeds from the sale, the seller may want to consider a 1031 Like-Kind exchange. This 1031 transaction will allow the seller to postpone paying any capital gains tax by deferring the tax into the future. Now that capital gains tax has increased by 80% (from 15% to 24.8%), 1031 exchanges are more attractive.

Before you sell your property, consult with a real estate attorney who is familiar with the new tax laws.

 

Snapshot of 2013 Federal Capital Gain Tax Rates

 

Single Taxpayer

Married Filing Jointly

Capital Gain
Tax Rate

Section 1411
Medicare Surtax

Combined
Tax Rate

$0 – $36,250

$0 – $72,500

0%

0%

0%

$36,250 – $200,000

$72,500 – $250,000

15%

0%

15%

$200,000 – $400,000

$250,000 – $450,000

15%

3.8%

18.8%

$400,001+

$450,001+

20%

3.8%

23.8%

*The 3.8% Medicare surtax only applies to “net investment income” as defined in IRC §1411.