Talking to sellers of Maui properties, I have realized there are so many misconceptions about the change in tax rate in 2013 on the sale of real property.
I have used information from the National Association of Realtors pamphlet "The 3.8% Tax Information." This is not intended to be a complete or comprehensive final analysis. You should always consult your tax professional for how changes in the tax law will affect you.
"Beginning Jan. 1, 2013, a new 3.8 percent tax on some investment income will take effect. Since this new tax will affect some real estate transactions, it is important to clearly understand the tax and how it could impact real estate transactions. It's a complicated tax, so you won't be able to predict how it will affect every buyer or seller. This new tax - passed by Congress in 2010 with the intent of generating an estimated $210 billion to help fund President Barack Obama's health care and Medicare overhaul plans - could be relevant to sellers and buyers," the NAR pamphlet explains.
This Kaanapali Golf Estates home at 361 A‘alii Way is available for $2,275,000. A vacant ocean view lot next door is on sale for $485,000.
"Understand that this tax WILL NOT be imposed on all real estate transactions, which is a common misconception. Rather, when the legislation becomes effective in 2013, it may impose a 3.8% tax on some (but not all) income from interest, dividends, rents (less expenses) and capital gains (less capital losses). The tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI.
"A second new tax, also dedicated to Medicare funding, is imposed on the so-called 'earned' income of higher income individuals. This earned income tax has a much lower rate of 0.9% (0.009). This additional or alternative tax is based on adjusted gross income thresholds of $200,000 for an individual and $250,000 on a joint return. Like the 3.8% tax, this 0.9% tax is imposed only on the excess of earned income above the threshold amounts.
"Another way of thinking about these new taxes is to think of the 3.8% tax as being imposed on a portion of the money that you make on your money - your capital (sometimes referred to as 'unearned income'). The 0.9% tax is imposed on a portion of the money you make on your labor - your salary, wages, commission and similar income related to earning a livelihood."
As the sale of real estate is still sluggish, it is best to plan ahead as to how these taxes may affect you in 2013. Please consult your tax professional. Check the web for information and the complete brochure from the National Association of Realtors with help in understanding the upcoming changes. Once you have a course of action, contact Laurie Lowson, R (B), at Laurie@Lowson.com to buy or sell on Maui.