A 92 Year-Old Solution for Real Estate Investors
Facing Higher Taxes in 2013:


1031 Exchanges Offer Full Deferral of the
New 3.8% Medicare Surtax and 20% Capital Gain Tax

The familiar adage, “It’s not how much you make, but how much you keep” rings truer than ever for real estate investors in 2013. Not only have capital gain taxes increased significantly for high earners, but many investors below the top tax bracket face an additional 3.8% surtax on passive investment income like capital gains. Fortunately, IRC Section 1031, a provision which has been in the tax code since 1921, provides critically needed tax relief.

Under the American Taxpayer Relief Act of 2012, the top capital gain tax rate has been permanently increased to 20% (up from 15%) for single filers with incomes above $400,000 and married couples filing jointly with incomes exceeding $450,000. In addition, the new IRC Section 1411 3.8% Medicare surtax on net investment income, which includes capital gains, results in an overall rate for higher-income taxpayers of 23.8% -- a staggering 58% increase from 2012 tax rates!

Four Steps Involved in Determining Capital Gain Taxation

Absent the tax deferral benefits of a 1031 exchange, below is a summary of the four ways investors will be taxed on the sale of an investment property:

  1. Depreciation Recapture: Taxpayers will be taxed at a rate of 25% on all depreciation recapture.
  2. Federal Capital Gain Taxes: Investors owe Federal capital gain taxes on the remaining economic gain depending upon their taxable income. Since a new higher capital gain tax rate of 20% has been added to the tax code, investors exceeding the $400,000 taxable income threshold for single filers and married couples filing jointly with over $450,000 in taxable income will be subject to the new higher tax rate. The previous Federal capital gain tax rate of 15% remains for investors below these threshold income amounts.
  3. New Medicare Surtax Pursuant to IRC Section 1411: The Health Care and Education Reconciliation Act of 2010 added a new 3.8% Medicare Surtax on “net investment income.” This 3.8% Medicare surtax applies to taxpayers with “net investment income” who exceed threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly. Pursuant to IRC Section 1411, “net investment income” includes interest, dividends, capital gains, retirement income and income from partnerships (as well as other forms of “unearned income”).
  4. State Taxes: Taxpayers must also take into account the applicable state tax, if any, to determine their total tax owed. Some states have no state taxes at all, while other states, like California, have a 13.3% top tax rate.

Snapshot of 2013 Federal Capital Gain Tax Rates

 
Single Taxpayer
Married Filing Jointly
Capital Gain
Tax Rate
Section 1411
Medicare Surtax
Combined
Tax Rate
$0 - $36,250
$0 - $72,500
0%
0%
0%
$36,250 - $200,000
$72,500 - $250,000
15%
0%
15%
$200,000 - $400,000
$250,000 - $450,000
15%
3.8%
18.8%
$400,001+
$450,001+
20%
3.8%
23.8%
*The 3.8% Medicare surtax only applies to "net investment income" as defined in IRC §1411.
 

1031 Exchanges Help Investors Defer the New 3.8% Medicare Surtax

Under recently proposed regulations, REG-130507-11, taxpayers have received proposed guidance from the IRS that notes: “to the extent gain from a like-kind exchange is not recognized for income tax purposes under Section 1031, it is not recognized for purposes of determining net investment income under Section 1411.” [§1.1411-5(C)(i)(2)(ii)]. Although these regulations are not yet finalized, taxpayers may rely on the proposed regulations to be in compliance with Section 1411 until the effective date of the final regulations.

Despite these new tax increases, one aspect of the tax code provides real estate investors with a huge tax advantage. Section 1031 allows property owners holding property for investment purposes to defer taxes that would otherwise be recognized upon the sale of investment property. Savvy investors use 1031 exchanges to redeploy their investment capital into better performing investment properties. An exchange provides a fantastic opportunity for investment property owners to defer all capital gain taxes that would otherwise be owed.

 
For more information on the New 2013 Capital Gain Taxes, call 800-282-1031 or Ask a Question via Email.
 

 

CAPITAL GAIN TAXES GOING UP, WAY UP (#135)
"58 PERCENT INCREASE IN CAPITAL GAIN TAXES IS COMING"

Written 2012

 

TAX INCREASE #1 - 20 PERCENT CAPITAL GAIN TAX IN 2013

The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extends the Bush-era tax cuts until the end of 2012. Beginning January 1, 2013, the tax rate will revert from the current 15 percent rate back to the former 20 percent capital gain tax rate that was in effect prior to 2003.

TAX INCREASE #2 - 3.8 PERCENT MEDICARE TAX IN 2013

Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under the law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.” In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 121 (capital gains), as well as gains on other property that are considered part of ordinary income. Also of relevance for rental property owners, this new tax applies to a real estate investor’s rental income if they have income above the $200,000/$250,000 income thresholds.

The net effect of both capital gain tax increases is a new 23.8 percent tax rate for higher earners—the highest rate for long-term capital gains since 1997. The Joint Committee on Taxation estimates the new Medicare tax on investments will cost taxpayers over $30 billion annually. Additionally, the modified adjusted gross income threshold at which this Medicare tax will apply will not be indexed for inflation, which means an increasing number of taxpayers will be snared by this tax provision.

Overall, the economic impact of these tax increases will be felt by the very investors who help promote long-term economic growth. In 2007, taxpayers with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends and an amazing 84 percent of all capital gains.

THE COMING TAX INCREASES - A COMPARISON

  Current January 2013
Conventional Short-Term 35.0% 43.4%
Conventional Long-Term 15.0% 23.8%
AMT Short-Term 28.0% 31.8%
AMT Long-Term 15.0% 23.8%

A SOLUTION AND WAY TO DEFER TAXES - 1031 EXCHANGES

Since  1921, 1031 exchanges have been a proven tax saving strategy that helps real estate investors improve their investment position through the ability to not recognize Federal or state capital gain taxes. Contact Asset Preservation at 800.282.1031 or via email at info@apiexchange.com!

Use Asset Preservation’s Capital Gain Tax Calculator to obtain an approximate estimate of your capital gain tax liability. Enter your figures in the fields provided and click on the 'Calculate' button in each area to determine your capital gain.Calculate Your Capital Gain Taxes Now.

10 MOST POPULAR ARTICLES:
Ordinary Income vs. Capital Gain
2012 Reviewed and Changes for 2013 
Impact of New 3.8% Medicare Tax on Investors
What is a 1031 Exchange?
What is a Qualified Intermediary?
5 Reasons to Exchange
1031 Exchange Basics
FIRPTA Withholding Rules
The Delayed Exchange 
Calculating Capital Gain

   
A Solution for Many Partnerships in 1031 Exchanges: The PIN
   
RESOURCES
Open a 1031 Exchange

Open an Exchange

Fast and easy 24/7


>
Go

National Headquarters: 800.282.1031
Eastern Regional Office: 866.394.1031

fea

Asset Preservation, Inc.
© Copyright 2014 Stewart Title Guaranty Company.
All rights reserved. Privacy Policy. Terms of use.

Open a 1031 Exchange Online 1031 Exchange Materials 1031 Exchange News Find a 1031 Exchange Expert 1031 Exchange Webinar and Podcast