Congress Considering New Tax Burdens on Real Estate

Dennis Norman

As the real estate market and industry continues to struggle to try to pull out of the dumps, another blow could come soon from Congress in the form of new tax burdens on real estate.

Congress is proposing that all owners of rental properties be required to complete and file 1099 forms for all service providers that have performed work on their properties, such as electricians, handymen, landscapers, etc. If passed, this would require all landlords, even the smallest of which, to go through additional expense and burden (or face penalties themselves from the IRS) to comply with this requirement.

The second issue, and perhaps one with a bigger negative impact, is to tax “carried interest” at ordinary income rates instead of the lower, capital gains rate. This would affect landlords and other investment/income property owners when they sell their property and realize the profit from their investment.

The National Association of REALTORS has come out in opposition to these two changes and has summoned their members to contact their Congressmen and Senators and urge them to oppose these two changes, hopefully Congress will listen.

Health Care To Be Subsidized By Real Estate

Dennis Norman

UPDATE: March 26, 2010: Pres Obama signed HR 35909 into law on March 23, 2010. Yesterday the House and Senate approved the final version of HR 4872 and it now goes to the President for his signature (this is the bill that “taxes” real estate to pay for health care as I explained below) – end of update

Unless you live in a cave you have probably heard by now that yesterday Congress passed HR 3590, the “Patient Protection and Affordable Care Act”, or to put it more short and to the point, Pres. Obama’s “health care overhaul”. It is anticipated that President Obama will sign this into law today or tomorrow.

Also passed yesterday by the US House of Representatives was HR 4872, the “Health Care and Education Affordability Reconcialiation Act of 2010“, which makes changes to HR 3590 (so why did the House pass HR 3590 if there were changes they wanted made?? Politics baby, politics!). As soon as the President signs HR 3590 into law the Senate will take up debate on HR 4872 and will take a simple majority (51) of the Senate for passage. If the Senate does approve this bill as written it will then go to the President to be signed into law and will amend the “Patient Protection and Affordable Care Act”.

So what does health care have to do with real estate? Plenty, because if HR 4872 (the Reconcialition Act) becomes law. real estate (along with other passive investments) will taxed to help fund the bill. I say this because of Sec. 1402 of the bill, which addresses “Medicare Tax” and states that:

‘‘(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.

This means that for people that have passive income from real estate, such as rents, will be subject to medicare tax on that income, unless, of course, you are under the income threshold amount which is defined in the bill as:

‘‘(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.

In addition, Obama’s 2011 budget proposes inreasing the tax rate on capital gains to 20 percent, from the current 15 percent, for “high-income taxpayers” (defined as copules with 2011 taxable income above $235,450 and single people with income over $194,050).

It will be interesting to see how this plays out in the days and weeks to come. The interesting thing will be to see how long it takes everyone (including the politicians thatvoted for this) to figure out what the true cost of this legislation will be….oh yeah, and also how many Doctors decide to take early retirement.