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The Top 4 Impacts of the Tax Relief Act on Real Estate Investments

By: Steve Goldman, CCIM

American-Taxpayer-Relief-ActBy Scott Headrick, CPA
Pinkstaff, Simpson, Hall & Headrick, P.C.
Exclusive to Goldman Partners Realty

On January 1, 2013, Congress passed the American Tax Relief Act of 2012 (“the Act”). Also, beginning in 2013, certain taxes imposed by the Patient Protection and Affordable Healthcare Act (commonly known as “Obamacare”) come into effect. These changes to the tax code and continuation of prior tax provisions will affect real estate investments. It is important to consider the following four impacts and discuss their implications with your tax advisor prior to making any real estate investment decisions.

1. Increased Capital Gains Rates – Prior to 2013, the capital gains rate was 0% for taxpayers in 15% or lower brackets and 15% for taxpayers in higher brackets. Prior to the Act being passed, rates were scheduled to increase to 10% and 20% respectively. The Act extended the lower rates of 0% and 15% for most taxpayers in 2013. But, the maximum capital gains rate in 2013 for taxpayers who have over $450,000 in taxable income increases to 20%.

2. 50% Bonus Depreciation Extended – Bonus depreciation under IRC Section 168(k) was first introduced in 2001 after the World Trade Center attacks. Since implementation, it has continued to be a fixture in the world of tax planning. The Act extends the 50% deduction for new property acquired and placed in service through 2013. The Act also extends the placed-in-service deadline for the $8,000 increase in first-year depreciation limit for vehicles subject to the §280F passenger auto depreciation limitations from December 31, 2012 to December 31, 2013.

3. 3.8% Medicare Contribution Tax on Investment Income – This new tax originates from the Obamacare legislation and applies to taxpayers with adjusted gross income in excess of the threshold amounts of $250,000 if married filing jointly ($200,000 if filing single). This tax is imposed on the Net Investment Income for these taxpayers. Net Investment Income includes interest, dividends, annuities, royalties, rents, certain “passive” income, and capital gains less applicable expenses. The tax is calculated as 3.8% of the lesser of an individual’s 1) modified adjusted gross income in excess of the threshold amount or 2) Net Investment Income.

4. Higher Limitations for Conservation Easements Contribution Deductions – Section 170(b)(1)(E) provided that an individual’s deduction for a qualified conservation contribution of real property is limited to 50% (rather than 30%) of the individual’s modified adjusted gross income less other contributions allowable for the year. An individual that is a qualified farmer or rancher can deduct up to 100% (rather than 30%) of the individual modified adjusted gross income less other charitable contributions allowable for the year. In any case, any excess can be carried forward up to 15 years. The Act retroactively extends the higher limitations through 2013.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that the author of this article is not providing accounting, tax, or legal advice nor is performing any legal, accounting, or other professional service. If accounting, tax, or legal advice or other expert assistance is required, the services of your CPA or another competent professional person should be sought.

Scott Headrick is a partner at Pinkstaff, Simpson, Hall & Headrick, P.C. He may be contacted at [email protected] or (865) 690-7010.

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