In Part 2 we will look at how the 3.8% Medicare surtax from “Obamacare” and elimination of the mortgage interest deduction could affect today’s election.
Before I get into those topics, I want to share a revenue producing idea for the government. I recently found out that in Australia, if you don’t vote you are fined. Now that’s a great way to get people to the polls and create revenue. On a more serious note, I feel strongly that we have a duty and a responsibility to vote. Men and women have given their lives so that we may have this freedom. I hope you honor them today and vote.
Effective January 1, 2013 – there will be a 3.8% tax on investment income. Some real estate transactions will be affected by this new law.
Here are the facts:
1) The new tax will affect individuals with more than $200,000 in adjusted gross income (AGI) and couples with (AGI) above $250,000. These incomes are not indexed for inflation so more people may be affected over time.
2) The tax will apply to either your net investment income or AGI whichever is less.
3) The gain from the sale of a principal residence ($250,000 for individuals or $500,000 for married filing jointly) will continue to be excluded.
4) Vacation home gain is still a gray area, it shouldn’t be included if you rent it out less than 14 days, but any gain from a sale other than your principal residence could be included.
5) Investment property – Falls into two categories:
A) If you have a job other than the owning and operating of real estate you will have to pay the surtax it you meet the above AGI minimum.
B) If your sole occupation involves owning and operating real estate typically you would not be subject to the surtax.
Mortgage Interest Deduction
Although Presidential candidate Mitt Romney has refused to say exactly which tax breaks he would eliminate if he became president, he has been very clear that there would be changes. He has used as an example the elimination of the mortgage interest deduction on high income earners as a way to create revenue for the Government.
If we look at it historically it would also make sense that Mr. Romney feels this is a good idea, since his father George Romney proposed the partial repeal of the mortgage-interest break to advocate economic redistribution in 1969.
At the Republican Convention, Gary Thomas, president-elect of the National Association of Realtors (NAR) warned against the elimination of the mortgage-interest deduction. Thomas was very negative when he talked about how this “limiting” would affect the market, “It’s going to reduce prices again. Which would drive that many more people underwater and could throw us back into a deeper recession…”
We know that Mr. Thomas isn’t the first lobbyist to panic over the homeowners’ tax break during a presidential campaign. There is a feeling that the deduction is more vulnerable this time than it was for instance back in 1996 when Steve Forbes wanted a flat-tax. Steve Forbes felt that elimination of the mortgage deduction “will help housing, not hurt it.”
The fact is, the mortgage interest deduction has been a subsidy from the government. The Congressional Budget Office estimates that the gradual elimination of the mortgage interest deduction would create about $215 billion in revenue by 2021.
On Capitol Hill lawmakers are concerned that this move could harm the already depressed housing market. Also the housing and mortgage industries have very powerful lobbyists that are making their voices heard.
Sen. Orin Hatch (R, Utah) has stated “With respect to the tax code, there are a number of proposals that would alter the treatment of housing, but any changes should happen only with the utmost care and significant transition period.”
This isn’t an issue that is going to go away anytime soon. There is too much on the line both for the real estate industry, tax revenues and individuals.
Most developed countries do not allow a deduction for interest on personal loans, which includes mortgage interest. The US, Netherlands and Switzerland are a few who do allow the deduction. Belgium, Ireland and Sweden only allow a minor part to be deducted.
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