“Chris, are you prepared for the Obamacare real estate investing tax”?
That was a real question I was asked two weekends ago when I was in San Diego speaking to 450 active real estate investors. From the concerned look on the face of the woman asking the question, apparently she was serious!
Up to that point, I was more concerned as a small business owner, and a successful one at that, about the effects of the health care law and was following closely the Supreme Court announcement simply to be prepared on what steps to take next. When the question came up, I answered the lady that I had no idea how health care was going to affect me as a real estate investor and I had not given it one thought to that point. I was much more concerned with concrete matters like avoiding cost overruns, delays in projects, vacant properties, uncollected rents, pending evictions, etc, etc… You know – I told her to focus on what she was at the conference for and learn – not fret over a non-existent tax!
That night I decided to Google the lady’s question and see if it had any merit – and here is the answer I came up with.
Is There A Tax On Real Estate Investment In Obamacare?
Yes. And No. As grey as that sounds, the truth is actual very black and white. Before I explain, I will tell you that worrying about it is best left to investors that like to worry. Not worrying about it is best left to investors that like to make money.
In the healthcare bill, there is a new tax created on investment income for high income households and it is called a 3.8% medicare tax. This tax will not affect all investment income and will not affect all real estate transactions. It is not a sales tax, but a levy tax against profit on certain transactions that meet a high threshold.
What Are The Parameters Of The New Real Estate Tax?
First of all, it is a tax that will only be imposed on households with a combined income above $250,000 or individuals with an income above $200,000. Regardless of the transaction, this is the first stipulation that must be met and excludes about 97% of all U.S. households. From there, well you definitely get penalized for making good business decisions!
The next stipulation is that you must make a return on the sale of the investment property above the capital gains threshold which is $250,000 for individuals and $500,000 for couples. That is a high threshold. At that point the tax does kick in, but only applies to the amount of income above the exclusion. For instance, if you sell a property and earn a $550,000 return as a couple, you will be subject to a 3.8% tax on $50,000 provided your adjusted gross income is above $250,000 for the year. If not, then there is no tax.
Why Is The Medicare 3.8% Tax on Investment Income Even In The Health Care Bill?
Beats the heck out of me! In the grand scheme of things, this particular provision promises to raise a very, very small amount of money. Given that less than 3% of U.S. households earn above $250,000 a year and the median price of a home in the U.S. today is roughly $150,000, I am not sure how this is going to raise much money at all. It will affect a relatively small number of people on an even smaller number of transactions.
But that does bring up another point – and this is a close as I will come to a political discussion.
It’s Only A Little Tax – You Can Afford It!
At the event, my point to the lady asking the question and to the audience had nothing to do with the size of the tax or if it even existed. She was there to learn how to be a better real estate investor. She had an opportunity to network and learn from 450 other investors from all over the country. Too often, we focus on the negative and not the positive and the negatives tend to get us a lot more fired up! When they do, our focus is all over the boards and not on the basics, which will ultimately cost each of us a lot more than a tax.
When I came off the stage a man was waiting for me and I guess he surmised from my answer that I was all for the healthcare plan and all for redistributing wealth. He mentioned how “all them conservatives make such a big deal when asked to give a little”. I asked him what he meant by his comment and he said that 3.8% was a small tax and if you are making money in real estate, who cares about giving a little. I told him that I thought he was missing the point of all those that were tired of giving a little. He had this perplexed look on his face and I said that I thought if he added one word to his statement he might understand where they were coming from.
It wasn’t that people don’t want to give a little. It is that each time they are being taxed to give a little “MORE”.
Ultimately, this new tax is now the law of the land and we’ll see if the legislature removes it. I think that is a highly doubtful proposition. In the end, none of us is going to stop making money simply because there is a new tax attached to it. Just know that it will affect a very small number of people on a very small number of transactions and as real estate investors we have much bigger issues to focus on!
UPDATE: Here are the sources I used – all found by entering the question into Google:
- 26 USC § 121 – EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE
- Get Ready for the New Investment Tax
- Home sales tax clarified
- 3.8 percent health care tax does not apply to all home sale profits
- NAR – Government Affairs Investing Tax Brochure
Photo: LaDawna HowardAre You Prepared For The 'Obamacare' Real Estate Investment Tax? by Chris Clothier