October 29, 2013
Commencing on January 1, 2013, important changes went into effect that significantly increased the federal income tax on the sale of real property by high income individuals.i Following is a brief description of how such sales will be taxed:
1. The income tax imposed on long term capital gains of individuals with adjusted gross income in excess of the following thresholds is increased from 15 percent to 20 percent:
(a) Married taxpayers filing jointly: $450,000
(b) Single heads of households: $425,000
(c) Singles: $400,000
2. A recapture tax of 25 percent is imposed on an amount equal to the aggregate amount of any depreciation deductions taken against the ordinary income of the taxpayer with respect to the property.
3. A 3.8 percent tax to fund the Affordable Care Act (better known as Obamacare) is imposed the lesser of the amount the taxpayer’s net investment income or the excess of his or her modified adjusted gross income above the following thresholds:
(a) For single taxpayers: $450,000
(b) For married taxpayers filing jointly: $425,000
(c) For married taxpayers filing separately: $400,000
In general, net investment income is comprised of unearned income including interest, dividends, royalties, rents,gains from the sale of property and income from a trade or business that is a passive activity with respect to the taxpayer or involves the trading of financial instruments or commodities. Net investment income also includes distributions of annuities and the lesser of the undistributed net investment income of a trust or the excess of adjusted gross income of the trust over the amount at which the tax bracket begins. Income generated from a trade or business of the taxpayer is exempt from this tax. Also exempt are distributions from a qualified plan.
Net investment income from disregarded entities is determined at the taxpayer level. Net investment income of passthrough entities is determined at the entity level.
Because the thresholds described in paragraphs 1 and 3 are measured against the referenced income in each taxable year, the aggregate tax liability of the taxpayer can be significatly reduced or eliminated by taking advantage of the installment sales provisions of the Internal Revenue Code, accepting the increased risk and complexity of these provisions.
To ensure compliance with requirements imposed by the internal revenue service, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. tax penalties.
i As described below, these increased tax liabilities will not apply to the sale of real property used by a taxpayer in a trade or business that is not a passive activity of the taxpayer.