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The Medicare Tax Hits High-Earning Investors

heroic investing logoAmong the flurry of changes in tax laws that took effect on the first day of 2013, some new and amended rulings affect property owners – both homeowners and investors in income property. While some of these changes apply to anyone who owns residential real estate, the Medicare Tax affects only those higher earning independent investors who own single-family homes or multiplexes.

The mortgage interest deduction, which survived the year-end budget negotiations, is available to anyone who holds mortgage, whether on a primary residence or an investment property. This break allows property owners to deduct interest on their private mortgage insurance, as part of the numerous tax breaks available to owners of both residential and income property.

Mortgage debt relief survived the fiscal agreement, too, sparing struggling homeowners from taxes on proceeds from short sales and refinancing. This kind of relief is aimed primarily at those in danger of losing their primary residence, not investment property owners. But investors carrying certain kinds of mortgages on income property may be able to qualify too.

But it’s the so-called Medicare Tax of 3.8% that will affect many rental property investors in 2013 and beyond. This tax, billed as  an investment surtax, applies not just to real estate, but also to a wide range of investments including dividends, capital gains and interest from sources such as bonds.

The Medicare Tax gets is name from the fact that it was originally passed as part of the Affordable Healthcare Act back in 2010, although it’s levied on investment income that has nothing to do with healthcare. And, as it’s currently written, this tax will hit primarily independent investors who maintain investment properties as a side project, not those who work full time managing their real estate portfolio. It also bypasses real estate companies and  investment groups.

Because the Medicare Tax is levied on investments, it applies to whatever kind of investment property an individual owns, whether it’s a single family home, a multiplex or even a small business location, The key provision is that the investment be “passive” – or not considered an active business the inventor engages in full-time. With that in mind, financial experts expect the hardest-hit to be professionals such as doctors or lawyers who maintain a few investment properties alongside their regular incomes.

Even at that, though, the Medicare Tax affects only a subset of those independent rental property investors – those whose net income exceeds $200,000 if single and @250,000 for a married couple. The tax is applied either to an investor’s net investment income, or the amount by which the adjusted gross income exceeds that income threshold, whichever amount is less.

The Medicare Tax, like other tax penalties aimed at higher-earning Americans, is here to stay. Investors following Jason Hartman’s strategist for creating passive income from properties may want to take a closer look at the provisions of the Medicare Tax and their own investing situations to determine whether this tax applies to their investments.

The Heroic Investing Team

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