What do real estate and Obama Care have in common? Tax brackets, that's what. Even if your Adjusted Gross Income Tax (AGI) is consistently under the $250,000 threshold, it only takes one small real estate deal to change everything by altering your net investment income tax (NIIT) figures. If you have considerable real estate holdings, you should consult a professional to see if there is anything you can do to avoid the 3.8% Obama Care Tax.
Things to Consider for the 2013 Tax Year
Activity Loss Rules (Code Section 469)
These tax rules were set in place in order to cut down on superfluous tax shelters. Although the regulations were complicated, in most cases they were applicable to real estate losses rather than real estate gains. However, all that has changed. Under the new rules, real estate profit that is a gain will be considered subject to NIIT. An exception would be if it is subject to self-employment taxes. Unless you are a real estate professional, rents will also be considered subject to NIIT.
What Properties are Exempt for Real Estate Professionals?
For this one, we will give the direct tax code lingo so there's no confusion:
Section 469(c)(7) and Sec. 1.469-9 provide special rules for
certain individual taxpayers involved in the conduct of real property
trades or businesses (real estate professionals). If a taxpayer meets
the requirements to be a real estate professional in section
469(c)(7)(B), the taxpayer’s interests in rental real estate are no
longer subject to section 469(c)(2), and the rental real estate
activities of the taxpayer will not be passive activities if the
taxpayer materially participates in each of those activities.
Can I Qualify as a Real Estate Professional to Avoid Obama Care Taxes?
Probably not. There is a 750-hour annual standard, which seems fairly easy to get around except that hourly total comes with the caveat that you have to spend more time on your real estate activities than any other professional activity. That is going to be a hard one to prove if you work full-time in another profession, or even part-time if you work an average of 14-hours or more per week at another job.
It also requires that you keep meticulous records of how you spend your time. We can assume that these new changes will keep IRS Auditors on the look out. If you are not a real estate professional by trade, then make sure your time keeping records are impeccable in case your 2013 Tax Forms have to run the proverbial audit gauntlet.
If you are a property owner with a consistent history of profitable rental properties, and you handle your own property management for the most part, then you should begin keeping records of your time and discuss the idea of stating yourself a "real estate professional" with your CPA. You might find out it is worth it.
Please Note: This blog is for informational purposes only. You should always speak with a professional tax accountant before making any significant changes on tax forms.