Landlord’s 3.8% medicare tax example

As I mentioned in an earlier post, in 2013, some lucky Landlords will face the new “3.8% tax” on investment income.  This legislation is unlikely to be affected by the “financial cliff” legislation (read: “Bush Tax Cuts”) that is the topic of so much news right now and so landlords need to get familiar with the rules.

The tax will apply to individual landlords with Adjusted Gross Income (AGI) over $200,000 and married couples filing jointly with AGI over $250,000.  The 3.8% tax applies to the lower of (1) the taxpayer’s “investment income” or  (2) the taxpayer’s excess of AGI in excess of the $200,000/$250,000 threshold.

It might be easier to understand in an example.  Let’s say that John and Sue are a married couple who file jointly and are landlords.  John and Sue have 6 rental buildings and they have good paying jobs.  Without taking their rental business into account, they have an AGI of $230,000.  From their rental activities, they take in rents of $200,000 and have rental expenses equal to $150,000 for a “net rental income” of $50,000.  Their total AGI is the original $230,000 plus $50,000 from rental activities for a total AGI of $280,000.  So, John and Sue have AGI over $250,000 in the amount of $30,000.  They have investment income from rental activities of $50,000.  The 3.8% tax will be applied to the excess over the threshold amount: $30,000 x .038 = $1140.

Keep in mind that “investment income” can include things other than rental income.  It can be the gain on the sale of real estate, interest income, dividend income, and capital gains on the sale of stocks and bonds.

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