Chris Stephens: ACA has a tax aimed at select taxpayers

Chris Stephens

In all the uproar over the Affordable Care Act -- also known as Obamacare -- you may have heard about a sales tax or transfer tax on real estate that will be used to help fund the law. This is not exactly correct. More specifically, the act includes a 3.8 percent real estate tax that applies to a limited group of taxpayers. This tax will help fund Medicare.

This column is based on an article by the National Association of Realtors titled "NAR Frequently Asked Questions Health Care Reform," which you can find online.

This gets a little technical but hang in there. The 3.8 percent tax is levied on something called "Unearned Income." This applies to more than just real estate, and includes dividend and interest income, and capital gain income.

Unearned Income is a tax term that refers to income from investments, not your regular work. For example, you have unearned income if you are part of a group that owns investment real estate and you are not active in managing the property. An example of such an investment group would be an LLC or partnership that owns any type of rental real estate.

The unearned income rule does not apply if the ownership and operation of real estate is your only occupation and is considered "trade or business" income.

The tax applies only to the net investment income, not the gross investment income. In the case of real estate investment, the net income is what is left after paying all expenses, which includes operating costs, depreciation and interest expense associated with the debt on the property. For most taxpayers, this is the same amount as reported on federal tax return form 1040 Schedule E.

The tax applies only to taxpayers with an Adjusted Gross Income, or AGI, of more than $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married couples filing separate returns. These amounts are called "AGI threshold." The tax is based on a formula comparing AGI to the taxpayers' unearned income. Note these amounts are not indexed to inflation, so over time a greater number of taxpayers will be subject to this tax.

Here is the tricky part. The tax is based on the following formula, not on the total AGI or the net investment income alone. The tax is based on the lesser of 1) net investment income, or 2) the excess of AGI over the AGI threshold, which is called the "Excess AGI."

Here is an example of what that means. Say a single person has AGI of $275,000, so his excess AGI would be $75,000. ($275,000 minus $200,000). In this example, his net investment income was $60,000 and is less than the excess AGI of $75,000. Therefore the tax would be based on the net investment income of $60,000 and would amount to $2,280. (3.8 percent of $60,000). If his investment income were $90,000, the excess AGI of $75,000 would be lesser amount. The tax would be based on the lesser amount and be $2,850.

The tax applies to capital gains in the same way, in the year that property is sold.

This tax took effect Jan. 1, 2013, and will apply only to taxes for this year.

That's it. The tax only applies to high income taxpayers under certain conditions and covers more than real estate. But taxes are never that simple, so be sure to go over this with your tax advisor.

Chris Stephens, CCIM, is a local associate broker specializing in commercial and investment real estate. His column appears every month in the Daily News.

Chris Stephens
Real Estate