Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/128835
INVESTMENT ANALYSIS Medicare Tax Concerns How does this new law affect real estate professionals? by William F. Becker Jr., CPA, and J. Bradley Campbell, CPA t The new 3.8 percent Medicare contribution tax on unearned income, effective for tax years beginning after Dec. 31, 2012, may directly affect many owner-operators and other real estate professionals. Passed by Congress in 2010 as part of the Patient Protection and Afordable Care Act, the 3.8 percent Medicare contribution tax is imposed on the lesser of an individual's net investment income for the tax year or modifed adjusted gross income in excess of $200,000 ($250,000 for married couples fling a joint return). If the Medicare surtax does apply, there is a particular impact on 16 May | June | 2013 real estate investors and owners. Net investment income includes net rental income unless it is derived in the ordinary course of a trade or business. Because some rental income is included in the defnition of net investment income, it is important to understand the factors that may determine the imposition of the Medicare surtax. Historically, qualifying as a real estate professional has generally been considered sufcient to demonstrate that a taxpayer is actively engaged in a trade or business and, accordingly, would not be subject to the Medicare surtax. To avoid classifcation as a passive activity, the taxpayer must manage or operate the property for more than 500 hours per year, provide substantially all of the work required to operate the property during the year, or work more than 100 hours during the year with no one else participating in the operation more than the taxpayer. However, the Internal Revenue Code specifes that each rental property is a separate activity, which requires the above tests to be applied on a property-by-property basis. To deal with such situations, a taxpayer may elect under IRC Section 469(c)(7)(A) to group multiple properties into a single activity to meet the material participation test. Te properties may include not only rental properties owned directly, but also properties owned through partnerships or other eligible entities. To make the election to group properties into a single activity, a statement must be attached to a timely fled tax return declaring the taxpayer's intent. Te pertinent criteria are included in Reg. Section 1.469-4(c)(2). Tis grouping option is not necessarily lost if the election was not made. In 2011, the Internal Revenue Service issued Revenue Procedure 2011-34, which allows for a late election to be made for prior years if the taxpayer can demonstrate reasonable cause for failing to timely fle an election, the afected properties were consistently grouped, and all earlier income tax returns were fled timely as if the election had been made. Once made, the election is generally irrevocable. Commercial Investment Real Estate MARK WEISS/GETTY IMAGES Grouping Properties