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New Tax on Unearned Net Investment Income Will Apply to Wealthiest Taxpayers

 Now that the U.S. Supreme Court has upheld the constitutionality of the Obama Administration’s health care overhaul plan, REALTORS® can expect to be questioned about a new 3.8 percent tax on unearned net investment income that was a provision of the plan and will take effect on January 1, 2013.  Here’s what you need to know.  First, it’s important to understand that this is not a real estate “sales tax” or property transfer tax as some reports have suggested since health care reform legislation was enacted in 2010.  The tax is limited in scope and will only apply to a group of “high income” taxpayers, specifically single tax filers with adjusted gross income (AGI) of more than $200,000 and married couples filing a joint return with AGI of over $250,000.  Furthermore, the 3.8 percent tax will only apply to “unearned income” derived from capital investments, which may include capital gains, rents, dividends and interest income, as well as investments in active businesses, if the investor is not an active participant in the business.

 Notably, not all unearned income will be subject to the new 3.8 percent tax.  Instead, it will only apply to the portion of unearned income derived from the above qualifying investment sources, less any expenses associated with earning that income.  Additionally, the new tax does not reduce or eliminate the benefits of the capital gains exclusion on the sale of a principal residence.  Thus, any gain from the sale of a primary home that is less than $250,000 for an individual tax return and $500,000 on a joint return will continue to be excluded for income tax purposes. 

Revenue generated from the tax will be used principally to bolster the Medicare Trust Fund program.  To learn more about the new 3.8 percent Medicare tax, see this FAQ prepared by NAR, a video and blog from NAR staff explaining the implications of the new tax, and articles and resources on the health care reform law posted on REALTOR.org.