Real Estate Professionals Navigating The New 3.8% Medicare Tax

by Bilzin Sumberg
Contact

https://jdsupra-html-images.s3-us-west-1.amazonaws.com/a21f6a06-afd2-4e93-86a1-015c97305cb3-piggybank-doctor-200x300.jpgWith a new year comes a new beginning. While New Year’s Day is typically viewed as a chance to start fresh and make changes in our personal lives, for many people New Year’s Day in 2013 took a different tone. Instead of focusing on making New Year’s resolutions, many Americans were focused on the “fiscal cliff” and their taxes. Lost in the “fiscal cliff” discussions, however, was the 3.8% Medicare contribution tax on net investment income introduced as part of the health care legislation in 2010, and which took effect on January 1, 2013.

Many in the real estate industry in South Florida will be surprised to learn that, not only is the 3.8% Medicare tax applicable to investment income such as interest, dividends and capital gains, but that it may also apply to rental income and other income earned in connection with a real estate business.

What Income is Subject to the 3.8% Medicare Tax?

The 3.8% Medicare tax generally applies to the investment income of taxpayers with income in excess of statutory thresholds. For this purpose, investment income is not limited to items such as interest, dividends and capital gains. It may also include (i) rental income, (ii) income from trade or business that is a “passive activity” to the taxpayer, and (ii) gain from the sale of an interest in a partnership, LLC or S corporation to the extent attributable to a business which is a “passive activity” with respect to the taxpayer.

Answers to frequently asked questions about the 3.8% Medicare tax can be found here

Does the Tax Apply to Your Real Estate Activities?

In the real estate industry, the 3.8% Medicare tax generally will apply to rental income, gain from the sale of investment real estate (including a second home that is not a primary residence) and gain from the sale of an interest in a real estate partnership, LLC or S corporation with respect to which an individual is considered a passive owner. Many individuals in the real estate industry that are actively involved in their business may simply assume that their rental income will not be subject to the 3.8% Medicare tax. Unfortunately, without proper planning, some will be surprised to learn that their rental income is subject to this new tax.

In general, any rental activity is characterized as a passive activity and subject to the 3.8% Medicare tax. There is, however, an exception to this rule for real estate professionals that derive rental income from a trade or business so long as they satisfy certain requirements related to the level of their participation in the business. The real estate trades or businesses to which the exception may apply include real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage.

Qualifying as a real estate professional does not, however, get you all the way there. An individual also needs to materially participate in the properties. The business of many people in the real estate industry involves multiple properties, which often makes it difficult to materially participate in each of them. Real estate professionals may want to consider the possibility of making a “grouping election” to treat all rental real estate activities as a single rental real estate activity, which may help meet the participation requirements for all of their rental properties.

With the application of the 3.8% Medicare tax on net investment income taking effect in 2013, the real estate industry will have a renewed focus on the tax implications relating to the level of participation in a real estate business, and individuals should consult with their tax advisors to determine whether they can avoid the 3.8% Medicare tax based on their active participation in real estate activities.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bilzin Sumberg | Attorney Advertising

Written by:

Bilzin Sumberg
Contact
more
less

Bilzin Sumberg on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.