Real Estate News & Commentary

Taxmaggedon: What Does it Mean for 2013?

Expertise: Business Management, Real Estate Investing Basics, Personal Finance, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
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Last year around tax time, the New York Times reported a chilling prediction for 2013. The report calculated that taxes will increase by thousands of dollars for many American families. Well, believe it or not that prediction has come true!

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Most Americans are aware that the U.S deficit is growing at an alarming rate, so it is not entirely a surprise that taxes are also on the rise. A key fact to consider is that these new tax increases impact just about everyone, not just the super wealthy. So how do you protect yourself?

The best way to begin defending yourself against these tax hikes is to understand the truth behind the new changes. This way, you can plan and prepare to ensure that you are not stuck with a large tax bill come April 2014. If you are a real estate investor, small business owner or a full time employee, you will want to make sure you plan ahead.

You may need to pay more taxes if you:   

  • Earn $200k per year individually or $250k as a couple, or
  • Own investment properties that have appreciated significantly in value, or
  • Own a business or real estate that you eventually plan on selling  

If you met any of the criteria above, don’t panic just yet. There is still time to plan and make sure you are protected from the new tax increases. Here are some tips to consider:

Old Strategies Still Work:

For some high income earners this year, capital gains taxes have increased. That's not the only bad news… on top of the capital gains tax increase there is also a brand new tax for anyone who makes more than $200,000 per year. For real estate investors, this can have a profound impact, especially if you are thinking about selling a property this year. Traditional tax deferral strategies like a 1031 exchange or seller financing can actually save you more money than it did in the past. Consider those options if you are thinking about selling your investment property, and make sure you give your tax advisor a call to crunch the numbers. Most of the time people are surprised to learn that old strategies can save them more than they originally thought.

Fortify Your Home:

Don't overlook the perks of owning a home. Some advantages are being able to write off your mortgage interest and being eligible for tax-free debt forgiveness. However, this year beware! If you have a gain that exceeds the exclusion amount for selling your home, you may be subject to an additional 3.8% tax.

Must-Know Strategies for 2013

Old strategies should not easily be pushed aside for this year as they still have some life to them and may continue to save you significantly in taxes. Depreciation is a perfect example of how you can reduce your overall taxes and retain your cash flow. So make sure you are writing off the purchase price of you investment properties over time with the correct depreciation.

Real estate professional status is a powerful strategy that real estate investors can still take advantage of. If you are spending more time in real estate related activities then in your regular W2 job, then you may qualify to take unlimited tax deductions for your real estate without having your real estate license. This strategy can help you to significantly decrease your taxes in these rising tax years.

Tax-Free Money:

In order to permanently protect yourself from rising taxes, you should consider having a Roth retirement account. A Roth IRA or Roth Solo(k) will allow you to truly take advantage of tax-free money. If you do not have one yet, it is not too late to open one for 2013. With the new taxes on the horizon, everyone should have a bucket of Roth money that is tax free – permanently.

Don’t be caught off guard during tax time with a huge tax bill. You have plenty of strategies at your fingertips to help ensure your hard-earned money won’t be depleted by taxes. All you need to protect yourself from Taxmaggedon is to work proactively with your tax advisor to put a plan in place now to protect your bottom line.

Photo Credit: SalFalko

Amanda is a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning with over 18 years’ experience. She is also a real estate investor of over 10 ye...
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    Replied almost 7 years ago
    Good article and good tips on protecting yourself from paying excess taxes. I am a little confused on something at the beginning of the piece where you said: You may need to pay more taxes if you: ?Earn $200k per year individually or $250k as a couple, or ?Own investment properties that have appreciated significantly in value, or ?Own a business or real estate that you eventually plan on selling The first one isn’t hard to figure out nor is it the first time I’ve heard that but what about the other 2? On point #2 are you only talking about if you sell this year? Higher Cap Gains would certainly cost you more in taxes. However as worded it almost sounds like you could be facing higher taxes even if you are just sitting on it. Similarly for point #3 why would the current tax rules mean I’d have to pay more for real estate or a business I may “Eventually” sell? Not sure if I am missing something big or just reading what you said wrong.
    Amanda Han
    Replied almost 7 years ago
    Hi Shaun: Thanks for your comment….it is actually probably a little bit of both. Now that I am re-reading it can be re-worded to be a bit more clear. Essentially, there are two new taxes that came into effect starting in 2012. One that applies to earned income which is .9% and the other one is investment income 3.8%. Most of the time RE investors are concerned with investments income as it applies to net rental, dividend, cap gains, and interest, etc. So if you hold on to a property then the net rental income may still be subject to the additional 3.8% in taxes if your income meets the threshold. This is regardless of whether the property is sold. If you have appreciated property that you plan on selling in the future (provided that these taxes are still in place) then the capital gains on the sale of that asset may also be subject to that new tax. So depending on what type of RE you do…for long term hold investors, the two potential exposure areas are 1. net rental income and 2. capital gain on the eventual sale. Hope this helps!
    Replied almost 7 years ago
    Hi Amanda, Thank you for the clarification. I was aware of that 3.8% “Obamacare” tax and it’s potential impact. Can you say a little more about this 0.9% earned income one. I don’t think I had heard about that one previously.
    Amanda Han
    Replied almost 7 years ago
    Sure…the .9% is on earned income (ie W-2, 1099, active business income). Essentially if it is not investment it is probably earned income. So between the two new taxes…they get you either way. The same threshold applies to both. For real estate, common examples that may be subject to the .9% could be wholesale, fix n flip, syndication, real estate commissions, etc. Hope this helps!