Real Estate "Sales Tax" – Health Insurance Reform: Frequently Asked Questions (FAQs)

New Medicare Tax on “Unearned” Net Investment Income
(Courtesy NAR., Last updated: Feb. 16, 2012)

REALTOR logo

Q-1: Is there a 3.8% real estate “sales tax” or a transfer tax created in health care bill?

A: No. There is neither a real estate “sales tax” nor a real estate transfer
tax under any federal law. The Internet has generated several viral items
describing such a tax. Those Internet postings are totally false. The 2010
health care legislation did create a new 3.8% tax, but it applies only to a
limited group of taxpayers.

Q-2: So who will be subject to the new tax? When is it effective?

A: The new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. The new Medicare tax on unearned income will take effect January 1, 2013. Proceeds from the tax will be allocated to shoring up the Medicare fund.

Q-3: Who is a “High Income” Taxpayer?

A: Those whose tax filing status is “single” will be subject to the new unearned income taxes if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return with AGI of more than $250,000 will also be subject to the new tax. (The AGI threshold for married filing separate returns is $125,000.)

Q-4: Are the $200,000 and $250,000 thresholds indexed for inflation?

A: No.Thus, over time, more individuals may become
subject to this tax.

Q-5: What is “unearned” net investment income?

A. Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business. The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any
expenses associated with earning that income. (Hence the term “net” investment
income.)

Q-6: So the new tax will apply to rents from investment properties that I own?

A: Maybe. Remember that net investment income includes only net rental income. Thus, gross rents would not be subject to the tax. Rather, gross rents would be reduced (as they are under the income tax) by all allowable expenses, including depreciation,
cost of repairs, property taxes and interest expense associated with debt
service. AGI includes net income from rent, so if your AGI is above the
$200,000/$250,000 thresholds, then the rental income might be subject to the tax.

For many investment real estate owners, the net rents will be the
same as or similar to the amounts reported on their Schedule E, filed with their
Form 1040 Income Tax Return. (For calculations, see Q-7, below. See also Q-8
through Q-12 related to capital gain from sale of principal residence, losses on
sale and to vacation homes, below.)

Q-7: Does the tax apply to the yearly appreciation of an asset?

A: No. Capital gains are subject to this new tax only in the year when the asset is sold. The amount of the gain will be measured in the same way that it is for income tax
purposes. This rule applies to real estate and all other appreciating capital
assets. Net capital gains are taxable only in the year of sale.

Q-8: How is the new 3.8% Medicare tax calculated?

A: The new 3.8% Medicare tax is assessed only when Adjusted Gross Income
(AGI) is more than $200,000/$250,000. (See Q-2 above.) AGI includes net income
from interest, dividends, rents and capital gains, as well as earned
compensation and several additional forms of income presented on a Form 1040
Income Tax Return.

The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. Rather, the taxable amount will depend on the operation of a formula. The taxpayer will determine the LESSER of (1) net investment income OR (2) the
excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment
income is the smaller amount, then the 3.8% tax is applied onlyto the net
investment income amount. If the excess over the thresholds is the smaller
amount, then the 3.8% tax would apply only to the excess amount.

Q-9: Give me an example.

If AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000.

If this single individual had AGI if $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over
$200,000.

Rules of thumb for predicting the application of this tax year to year are not readily determinable, largely because the proportion of net investment income compared to AGI will vary from year to year and from individual to individual.

Q-10: Will the $250,000/$500,000 exclusion on the sale of a principal residence continue to apply?

A: Yes. Any gain from the sale of a principal residence that is less than
$250,000 (individual) or $500,000 (joint return) will continue to be excluded
from the income tax. The new 3.8% tax will NOT apply to this excluded amount of
the gain.

Q-11: Will the 3.8% tax apply to any part of the gain on the sale of a principal residence?

A: Maybe. The new Medicare tax would apply only to any gain realized that is more
than the $250K/$500K existing primary home exclusion (known as the “taxable
gain”), and only if the seller has AGI above the $200K/$250K AGI thresholds.

So, for example, if the taxable gain was $30,000 and a married couple had AGI (which would include the taxable gain) of $180,000, the 3.8% tax would not apply because AGI is less than $250,000. If that same couple had AGI of $290,000, then the application of the 3.8% tax would be subject to the same formula described above. The $30,000 taxable gain on the sale would be less than the $40,000 excess above $250,000 AGI, so the $30,000 gain would be subject to the new 3.8% tax.

Q-12: Is rent from a vacation home subject to the 3.8% tax? And what about the gain on sale of a vacation or rental property?

A: The application of the tax will depend on whether the vacation home has been rented out, the period for which it has been rented and whether the property is solely for the enjoyment of the owner. If the owner has rented the home out to others, then the 14-day rent exclusion will continue to apply. Thus, if the owner rents the property to
others (including family members) for 14 or fewer days, there would be no net
investment tax. (Note that no deductions for expenses would be available, as
under current law.)

If the home has been rented to others (including family members) for more than 14 days, then the rents (minus related expenses) would be considered as part of net investment income and could, depending on AGI and the calculations described above, be subject to the new tax.

If the vacation home has been used solely for personal enjoyment (i.e., there is no
rental income and no associated expenses), then a gain on sale would be treated
as net investment income and could be subject to the tax, depending on AGI.
Similarly, if the property had generated rents, any net gain on sale could also
be included in net investment income. The amount of the tax (if any) would
depend on the calculation formula, above in Q-8 and Q-9.

Q-13: My rental property generates a net loss each year. How will those losses be factored into the new tax? And what if I have net capital losses when I sell?

A: Net losses from rents and net capital losses reduce AGI. Thus, the losses themselves would not be subject to the tax. If, after losses, AGI still exceeds the High Income thresholds, the 3.8% tax would still apply to any net rental, interest or dividends income.

Q-14: I earn all of my income from real estate investments that I own and operate myself. Will my rents and gains be subject to the new
tax?

A: No. If the ownership and operation of real estate you own
is your sole occupation, then those activities are what’s called your “trade or
business.” Income derived from a trade or business is not subject to the new
3.8% tax. If the owner of rental properties has a “day job,” however, real
estate investments are not considered as a trade or business, but are rather
considered as investments, even if they are a major source of income.

Many Realtors engage in business activities are that are the “typical”
selling, leasing and brokerage endeavors usually associated with the term
“Realtor.” If they also own rental real estate assets as part of their own
personal investment portfolio, the net rents from that portfolio could become
subject to the new 3.8% tax on net investment income, depending on AGI.

Q-15: Will “High Income Filers” lose any portion of the Mortgage Interest Deduction?

A: No. The mortgage interest deduction is unchanged. No cap was imposed on any itemized deductions.

Q-16: Why is this new tax called a “Medicare tax?”

A: The revenues generated from this tax will be allocated to the Medicare
Trust Fund that is part of the Social Security System. That fund is currently on
shaky financial footing. These additional revenues are intended to shore up the
Medicare Trust Fund.

Q-17: How will this new tax affect marginal (the highest) tax rates when it is combined with existing law and with the possible expiration of the Bush tax cuts enacted in 2001?

A: Marginal tax rates are the tax rates assessed on the “last” dollars
included in taxable income. If the Bush tax cuts are allowed to expire, then the
marginal rates for upper income individuals will increase, particularly for
capital gains income. The chart below reflects the impact of those changes,
presented based on implementation of current law effective dates.

Real Estate “Sales Tax” – Health Insurance Reform: Frequently Asked Questions (FAQs)

New Medicare Tax on “Unearned” Net Investment Income
(Courtesy NAR., Last updated: Feb. 16, 2012)

REALTOR logo

Q-1: Is there a 3.8% real estate “sales tax” or a transfer tax created in health care bill?

A: No. There is neither a real estate “sales tax” nor a real estate transfer
tax under any federal law. The Internet has generated several viral items
describing such a tax. Those Internet postings are totally false. The 2010
health care legislation did create a new 3.8% tax, but it applies only to a
limited group of taxpayers.

Q-2: So who will be subject to the new tax? When is it effective?

A: The new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. The new Medicare tax on unearned income will take effect January 1, 2013. Proceeds from the tax will be allocated to shoring up the Medicare fund.

Q-3: Who is a “High Income” Taxpayer?

A: Those whose tax filing status is “single” will be subject to the new unearned income taxes if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return with AGI of more than $250,000 will also be subject to the new tax. (The AGI threshold for married filing separate returns is $125,000.)

Q-4: Are the $200,000 and $250,000 thresholds indexed for inflation?

A: No.Thus, over time, more individuals may become
subject to this tax.

Q-5: What is “unearned” net investment income?

A. Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business. The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any
expenses associated with earning that income. (Hence the term “net” investment
income.)

Q-6: So the new tax will apply to rents from investment properties that I own?

A: Maybe. Remember that net investment income includes only net rental income. Thus, gross rents would not be subject to the tax. Rather, gross rents would be reduced (as they are under the income tax) by all allowable expenses, including depreciation,
cost of repairs, property taxes and interest expense associated with debt
service. AGI includes net income from rent, so if your AGI is above the
$200,000/$250,000 thresholds, then the rental income might be subject to the tax.

For many investment real estate owners, the net rents will be the
same as or similar to the amounts reported on their Schedule E, filed with their
Form 1040 Income Tax Return. (For calculations, see Q-7, below. See also Q-8
through Q-12 related to capital gain from sale of principal residence, losses on
sale and to vacation homes, below.)

Q-7: Does the tax apply to the yearly appreciation of an asset?

A: No. Capital gains are subject to this new tax only in the year when the asset is sold. The amount of the gain will be measured in the same way that it is for income tax
purposes. This rule applies to real estate and all other appreciating capital
assets. Net capital gains are taxable only in the year of sale.

Q-8: How is the new 3.8% Medicare tax calculated?

A: The new 3.8% Medicare tax is assessed only when Adjusted Gross Income
(AGI) is more than $200,000/$250,000. (See Q-2 above.) AGI includes net income
from interest, dividends, rents and capital gains, as well as earned
compensation and several additional forms of income presented on a Form 1040
Income Tax Return.

The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. Rather, the taxable amount will depend on the operation of a formula. The taxpayer will determine the LESSER of (1) net investment income OR (2) the
excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment
income is the smaller amount, then the 3.8% tax is applied onlyto the net
investment income amount. If the excess over the thresholds is the smaller
amount, then the 3.8% tax would apply only to the excess amount.

Q-9: Give me an example.

If AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000.

If this single individual had AGI if $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over
$200,000.

Rules of thumb for predicting the application of this tax year to year are not readily determinable, largely because the proportion of net investment income compared to AGI will vary from year to year and from individual to individual.

Q-10: Will the $250,000/$500,000 exclusion on the sale of a principal residence continue to apply?

A: Yes. Any gain from the sale of a principal residence that is less than
$250,000 (individual) or $500,000 (joint return) will continue to be excluded
from the income tax. The new 3.8% tax will NOT apply to this excluded amount of
the gain.

Q-11: Will the 3.8% tax apply to any part of the gain on the sale of a principal residence?

A: Maybe. The new Medicare tax would apply only to any gain realized that is more
than the $250K/$500K existing primary home exclusion (known as the “taxable
gain”), and only if the seller has AGI above the $200K/$250K AGI thresholds.

So, for example, if the taxable gain was $30,000 and a married couple had AGI (which would include the taxable gain) of $180,000, the 3.8% tax would not apply because AGI is less than $250,000. If that same couple had AGI of $290,000, then the application of the 3.8% tax would be subject to the same formula described above. The $30,000 taxable gain on the sale would be less than the $40,000 excess above $250,000 AGI, so the $30,000 gain would be subject to the new 3.8% tax.

Q-12: Is rent from a vacation home subject to the 3.8% tax? And what about the gain on sale of a vacation or rental property?

A: The application of the tax will depend on whether the vacation home has been rented out, the period for which it has been rented and whether the property is solely for the enjoyment of the owner. If the owner has rented the home out to others, then the 14-day rent exclusion will continue to apply. Thus, if the owner rents the property to
others (including family members) for 14 or fewer days, there would be no net
investment tax. (Note that no deductions for expenses would be available, as
under current law.)

If the home has been rented to others (including family members) for more than 14 days, then the rents (minus related expenses) would be considered as part of net investment income and could, depending on AGI and the calculations described above, be subject to the new tax.

If the vacation home has been used solely for personal enjoyment (i.e., there is no
rental income and no associated expenses), then a gain on sale would be treated
as net investment income and could be subject to the tax, depending on AGI.
Similarly, if the property had generated rents, any net gain on sale could also
be included in net investment income. The amount of the tax (if any) would
depend on the calculation formula, above in Q-8 and Q-9.

Q-13: My rental property generates a net loss each year. How will those losses be factored into the new tax? And what if I have net capital losses when I sell?

A: Net losses from rents and net capital losses reduce AGI. Thus, the losses themselves would not be subject to the tax. If, after losses, AGI still exceeds the High Income thresholds, the 3.8% tax would still apply to any net rental, interest or dividends income.

Q-14: I earn all of my income from real estate investments that I own and operate myself. Will my rents and gains be subject to the new
tax?

A: No. If the ownership and operation of real estate you own
is your sole occupation, then those activities are what’s called your “trade or
business.” Income derived from a trade or business is not subject to the new
3.8% tax. If the owner of rental properties has a “day job,” however, real
estate investments are not considered as a trade or business, but are rather
considered as investments, even if they are a major source of income.

Many Realtors engage in business activities are that are the “typical”
selling, leasing and brokerage endeavors usually associated with the term
“Realtor.” If they also own rental real estate assets as part of their own
personal investment portfolio, the net rents from that portfolio could become
subject to the new 3.8% tax on net investment income, depending on AGI.

Q-15: Will “High Income Filers” lose any portion of the Mortgage Interest Deduction?

A: No. The mortgage interest deduction is unchanged. No cap was imposed on any itemized deductions.

Q-16: Why is this new tax called a “Medicare tax?”

A: The revenues generated from this tax will be allocated to the Medicare
Trust Fund that is part of the Social Security System. That fund is currently on
shaky financial footing. These additional revenues are intended to shore up the
Medicare Trust Fund.

Q-17: How will this new tax affect marginal (the highest) tax rates when it is combined with existing law and with the possible expiration of the Bush tax cuts enacted in 2001?

A: Marginal tax rates are the tax rates assessed on the “last” dollars
included in taxable income. If the Bush tax cuts are allowed to expire, then the
marginal rates for upper income individuals will increase, particularly for
capital gains income. The chart below reflects the impact of those changes,
presented based on implementation of current law effective dates.

No More NACA for Me

I will be the first to admit that trying to be nice does not always work out, no matter how hard we try. This would prove true, once more, with yet another offer from near the pit of H-E-double hockey sticks. Not the actual pit, but very close…I would say they are definitely neighbors.

After much hesitation, I decided to accept a NACA offer on a short sale (I now know, already a bad decision).

Turns out the agent on this offer was the same agent, just one short month prior, who had made an offer on another listing of mine. Upon receiving the offer, I see that the offer was a NACA offer and the offer was missing a 4-page seller document addendum that we ask the buyer to review and sign on all our short sales to protect our sellers and assist the buyer with understanding the process. When I asked her about the document (two times), I got no response.

Fast forward to the current listing. So I already have these somewhat sour feelings toward this agent because of her lack of responsiveness and follow up. But I figure I’m being too hard, let it go Keisha, let it go… I tell myself. However, upon closer review of the new offer, it too is a NACA offer and, you guessed it, it was missing the same 4-page addendum.

So I call the agent and ask her about the addendum and while I was at it, asked her about the previous offer. She basically said her buyer’s went with another property, so she just didn’t respond. Then I ask her about the NACA program, which also states I must use THEIR title company – which is in Fairfield, and not my trusted title teams that always come through for me (Chicago Title and North American Title). I know that there are excellent title and escrow officers out there, but dag nab it, I like my escrow officers because they know me, I know them, and we have developed an unspoken relationship, like a marriage… you know what I mean? That’s like the NFL commiss telling the Green Bay Packers they get to go to the Superbowl, but they gotta use the Kansas City Chiefs quarterback! He’s a great quarterback but he’s not THEIR quarterback!

So, I express this concern to the agent. She follows up with me several days later to assure me that it would not be an issue and I could use my same company..hooray!! <so I thought>

We move forward and the “snags” begin. Why, oh why did I not follow my first mind in an attempt to be nice? I so regret it. I hope something positive comes out of this.  We received the approval letter on June 14, we were scheduled to close tomorrow (35 day escrow). My seller signed almost two weeks ago (prior to going on vacation) because the buyer’s agent said the buyer wanted to close early. Docs were to arrive at title yesterday but the GFI had to be re-submitted and processing was gone for the day so, yes, another hold up. As I am writing this post I just received a request asking for a seven day extension (42 day escrow) because now there is a “condition on the appraisal”… docs still are not at title.

Oh wait, another email from the NACA rep “My Apologies- I was with a member- We need to ensure time to get the clear, however, we already have authorization to rush docs. I said 7 days on the extension to ensure we have enough time as tomorrow is Friday and if for some unforeseen reason we do not get the close tomorrow we would be right back in the same situation.”

What? “…if for some unforeseen reason we do not get the close tomorrow…” Ok, let’s do a little math here. it’s 5:51 p.m. Thursday. Buyer hasn’t signed. Takes 24 hours to fund once buyer signs. Does a situation still qualify as unforseen when you can see it? What are the chances that this file will close tomorrow? What should be my response to this? How would you respond? Am I blowing this out of proportion?

#nomorenacaforme

About Good Neighbor Next Door

(from HUD.gov, July 19, 2012)

Law enforcement officers, pre-Kindergarten through 12th grade teachers and firefighters/emergency medical technicians can contribute to community revitalization while becoming homeowners through HUD’s Good Neighbor Next Door Sales Program. HUD offers a substantial incentive in the form of a discount of 50% from the list price of the home. In return you must commit to live in the property for 36 months as your sole residence.

More info here.

New Anti-Deficiency Protection for Refinance Loans Made After January 1, 2013

(Brought to you by the CALIFORNIA ASSOCIATION OF REALTORS®)

Starting January 1, 2013, a new California law will protect homeowners who default on their refinance loans from personal liability for any deficiency following foreclosure. Existing anti-deficiency law protects a borrower from personal liability for the difference between the principal balance and what the lender receives at foreclosure if the loan is a purchase money loan secured by an owner-occupied property with one-to-four residential units. The new law, Senate Bill 1069, extends that anti-deficiency protection to include any loan used to refinance the purchase money loan, plus any loan fees, costs, and related expenses for the refinance. The anti-deficiency protection, however, does not extend to any “cash out” in a refinance, which is when the lender advances new principal not applied to any obligation owed under the purchase money loan. This new law does not affect the other anti-deficiency protections for non-judicial foreclosures (or trustee’s sales) and seller financing.

This new law only applies to refinance loans or other credit transactions used to refinance a purchase money loan, or subsequent refinances of a purchase money loan, that are executed on or after January 1, 2013. For purposes of this law, any payment of principal shall be deemed to be applied first to the principal balance of the purchase money loan, and then to the principal balance of any new advance and interest payments shall be applied to any interest due and owing.

C.A.R. supported Senate Bill 1069 in the legislative process as many homeowners do not realize that, by refinancing, they lose their anti-deficiency protection for a purchase money loan. Senate Bill 1069 is similar to Senate Bill 1178 sponsored by C.A.R. in 2010, but vetoed by Governor Schwarzenegger. The full text of the law is available at www.leginfo.ca.gov.

California Homeowner Bill of Rights signed into law

(DSNEWS)

Governor Jerry Brown signed into law yesterday the Homeowner Bill of Rights to help struggling Californians keep their homes. This law aims to avoid foreclosure where possible to help stabilize California’s housing market and prevent the other negative effects of foreclosures on families, communities, and the economy. The new law will generally prohibit lenders from engaging in dual tracking, require a single point of contact for borrowers seeking foreclosure prevention alternatives, provide borrowers with certain safeguards during the foreclosure process, and provide borrowers with the right to sue lenders for material violations of this law.

Making sense of the story The Bill of Rights prohibits “dual track” foreclosures that occur when a mortgage servicer continues foreclosure while also reviewing a homeowner’s application for a loan modification.

Under the new law, homeowners must be provided with a single point of contact when negotiating a loan modification.

It expands notice requirements that must be provided to a borrower before taking action on a loan modification application or pursuing foreclosure.

Additionally, the bill allows injunctions against foreclosure until violations are corrected and permits civil penalties against servicers that file multiple, inaccurate mortgage documents or commit reckless or willful violations of law.

These new laws make California the first state in the nation to take provisions in the National Mortgage Settlement, which covered the nation’s five largest mortgage loan servicers, and apply those rules to all mortgage servicers.

The law will go into effect January 1, 2013.

Your Ticket to Freedom from Mortgage Frustration

In the news, there is talk of a housing recovery. Experts feel more optimistic about the state of housing industry in America. However, if you or someone you know is one of the millions of homeowners who is stuck with a home on which you owe more than the property is worth, the feeling of helplessness can be overwhelming and frustrating.

Many people don’t realize that just because they are in danger of losing their home to foreclosure doesn’t mean they have to wait around for it to happen. With help, they can take matters into their own hands.

CLAIM YOUR TICKET TO FREEDOM!

As a Certified Distressed Property Expert (CDPE), I make it my business to know all of the ins-and-outs of the options that are available for people who are in danger of losing their homes and help the challenges head-on.

Take a look at the information on this site and then Contact me today to schedule a free, confidential consultation.