Are you better off with Obama? Look at what is about to hit us in 2013!

Here is the synopsis in short of HR 4872 Health Care and Education Reconciliation Act when it was signed into law.

: Effective January 1, 2013 there is a new 3.8% tax
: It is NOT a tax on all real estate transactions.
: It IS a Medicare tax on “NET INVESTMENT INCOME” over a certain threshold.
: Many people will not have to pay this tax.

Who does this effect? The best answer, I think, comes from the law itself. The Act says:

“(a) IN GENERAL.-Except as provided in subsection (e)-

(1) APPLICATION TO INDIVIDUALS.-In the case of an individual, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax equal to 3.8 percent of the lesser of-

(A) net investment income for such taxable year, or
(B) the excess (if any) of-
(i) the modified adjusted gross income for such taxable year, over
(ii) the threshold amount.

(b) THRESHOLD AMOUNT.-For purposes of this chapter, the term ‘threshold amount’ means-

1) in the case of a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), $250,000,
(2) in the case of a married taxpayer (as defined in section 7703) filing a separate return, 1/2 of the dollar amount determined under paragraph (1), and
(3) in any other case, $200,000.”

What this mean:

: The tax would not be imposed until the threshold of $200K for singles or $250K for married filing jointly is exceeded.

: The 3.8% would be imposed on the LESSER of the net investment income OR the modified AGI in excess of the threshold.

: If you have NO ‘net investment income’ you will not pay the surtax even if your income exceeds the threshold.

Net investment income, includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses IF the investor is not an active participant in the business. The portion of investment income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.)

Wholesalers rejoice. Income from “flipping” is generally considered EARNED income, NOT investment income, and wouldn’t be subject to the surtax ( They already hit us wholesalers hard as dealers)

This is definitely a convoluted piece of legislation, and you should certainly run this stuff by your own tax pro. Only he or she can definitively advise you about your personal tax situation.

The National Association of Realtors has already addressed this issue. As you read you realize it is a VERY complicated tax which will take an accountant to help determine if clients will have to pay the tax


My take on this tax is the only ones that should object to it are in fact the ones that make $200K or $250K depending on marital status of “Investment Income” (Now I understand why certain politicians want to kill the law). For those us in the real estate investing business, as long as you are doing your deals through a self-directed IRA, this law is a non-issue if you are making more than the threshold amounts!

Please review any new legislation and make your own Independent analysis of it and then vote accordingly.

Duncan Wierman manages real estate investment funds created for conservative investors who want returns and tax savings that exist in multifamily real estate in emerging markets. For more information about his company, please go to

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