December 2, 2013

By now, everyone should have filed their 2012 business and individual income tax returns. Before we settle into the holidays, let’s not forget to do some basic year-end tax planning.

The American Taxpayer Relief Act of 2012 (ATRA) passed in January 2013, as well as the Patient Protection and Affordable Care Act (Obamacare), contained significant tax law changes that take effect in 2013 of which taxpayers may not be aware.

3.8% Tax on Net Investment Income

What’s Included in This Tax?

The Affordable Care Act is funded by the addition of a 3.8% tax on Net Investment Income. Gross receipts from passive rental activities are included in the calculation of Net Investment Income and are subject to this new tax.

In order to avoid the Net Investment Income tax, taxpayers with rental activities that are considered a trade or business, would need to also qualify as a Real Estate Professional. To meet the Real Estate Professional criteria, the taxpayer must meet certain hour requirements performing duties in specific real property activities.

For those taxpayers who actively manage and care for their rental properties, the IRS has provided an irrevocable election to pool these activities, whereby the taxpayer collectively could achieve the hour requirement necessary to be a Real Estate Professional. Pooling the rental activities would convert their once passive rental activities into non-passive and potentially avoid the Net Investment Income Tax.

The Sale of LLC interest May Also be Impacted

This new Net Investment Income tax may also apply to the sale of your LLC interest. Many real estate deals are formed with one member contributing property with a fair market value in excess of their basis (Built-in Gain, or BIG) and other members contributing cash. Often the agreement may be silent as to the method used to cure the Built in Gain discrepancy or may use a default of the “Traditional” method. Non-contributing partners need to work with their tax advisers to make sure that that the method used doesn’t allocate to much of the BIG to them over time, thereby increasing their potential gain on the sale of the LLC assets that would be subject to the 3.8% Net Investment Income Tax.

ATRA Tax Benefits Due To Expire December 31, 2013

In addition to the changes to our tax system provided by the Affordable Care Act, the ATRA provided tax benefits that were beneficial to real property owners; however, these benefits are set to expire at the end of 2013.

These expiring opportunities include:

  • Section 179D Energy efficient commercial buildings deduction
  • Section 45L New Energy efficient home credit
  • Section 30C Alternative fuel vehicle refueling property credit
  • Section 162(k) “Bonus” depreciation on qualified leasehold improvement property
  • Section 162(e)(3)(E) 15-Year recovery on qualified leasehold improvement property and qualified restaurant property

Currently there is not much optimism that Congress will be able to extend any tax incentives with bi-partisan support by the end of the year.

Even if these expiring credits and deductions are not applicable to you, it is still a good time to meet with your tax advisors and do some basic tax planning.

© Clark Nuber PS and Developing News, 2013. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.