With real estate investments, income and capital gains taxes can be more complicated than many people imagine. As part of your overall wealth portfolio it is essential to pay close attention to the relationship between earned income and income and gains from real estate.
The tax code includes lots of ways to make real estate investments tax efficient. The key is to understand the proper use of each type of tax break and be smarter about your real estate holdings. In light of last year's tax increases, real estate holdings can impact significantly the tax burden faced by wealthy individuals.
The overall income tax rate now tops out at 39.6%. Next add the Medicare surtax of 0.9% on earned incomes of more than $250,000 for married filers and $200,000 for singles. We are not finished yet on the tax increases. You now have the Medicare tax of 3.8% on net investment income (which includes interest, dividends, capital gains, royalties and net rental income). If the bad news is not bad enough for real estate holders, the long-term capital gains tax rate for top earners rose to 20%.
Some of the areas that can get you in trouble are:
Passive or active ownership
Forgetting about losses
Mortgage interest deduction restrictions
Not following 1031 exchange rules
Again the key is to understand the proper use of each type of tax break, avoid tax problems and be smarter about your real estate holdings. We work closely with our clients’ tax advisor to make sure holdings and transactions are handled in the most tax efficient manner. I hope this information is helpful. If you would like more details about these provisions, please do not hesitate to call me.