By Gary Krupa, CPA
Here are provisions of the American Taxpayer Relief Act of 2012 (ATRA), or the so-called “fiscal cliff” legislation, that apply to residential real estate transactions. The Act took effect on January 1, 2013. In addition, a new 3.8% Medicare tax on investment income took effect on January 1, 2013. This tax is described below.
Capital gains and dividends
These provisions apply for tax years beginning after December 31, 2012.
The top tax rate for long-term capital gains and dividends has increased from 15% to 20% for taxpayers with taxable income over $400,000 if single, $450,000 if married filing jointly, and $425,000 for heads of households.
For joint filers with taxable income below $72,500, and single filers with taxable income below $36,250, the tax rate for long-term capital gains and dividends is zero percent.
Long-term capital gain rates apply if an asset has been held for more than one year.
Qualified dividends for all taxpayers continue to be taxed at long-term capital gains rates rather than at ordinary income rates.
Short-term capital gains will still be taxed at ordinary income rates.
The capital gain portion of installment payments received after 2012 is subject to the tax rates for the year of payment, not the year of the sale.
Alternative Minimum Tax (AMT)
The 2012 personal exemption amount is $50,600 for unmarried individuals, $78,750 for married taxpayers filing jointly and surviving spouses, and $39,375 for married individuals filing separately. This represents an increase of approximately 4% to 6% from 2011.
An annual inflation adjustment to the exemption amounts applies for tax years beginning after 2012.
For the AMT, personal exemptions and many itemized deductions aren’t allowable, and alternative minimum taxable income is subject to an AMT rate of 26% or 28%.
Distressed residential properties
The Qualified Principal Residence Indebtedness exclusion has been extended by the Act until December 31, 2013. This provision excludes from income cancellation of mortgage debt on a principal residence of up to $2 million. It must be related to a decline in the value of your home or financial condition. Also, the debt or refinancing of the debt must have been incurred to buy, build, or substantially improve your main home, and must be secured by your main home. For refinanced mortgage debt, the exclusion applies only up to the amount of the old mortgage principal just before the refinancing.
Mortgage insurance premiums
Mortgage insurance premiums may be deducted as qualified residence interest. This provision expired after 2011 but was extended by the Act until December 31, 2013.
Contributions of capital gain real property for conservation purposes
A larger charitable contribution deduction may be taken for real property contributed for contribution purposes. The deduction is limited to 50% of adjusted gross income minus your deduction for all other charitable contributions. The limitation is calculated separately from the 50% of AGI limit on all contributions. This rule applies until December 31, 2013.
Credit for energy-efficient new homes
This has been extended by the Act through 2013. The lifetime credit limit is $500 ($200 for windows and skylights), under the 2010 Tax Relief Act.
Charitable donations of property by S Corporations
The ATRA has extended the ability of S Corporation shareholders to deduct the fair market value of property the S Corporation donated to a charity. Prior to 2006, the deduction was limited to the basis of their stock.
3.8% tax on investment income
The tax is imposed on the lesser of the taxpayer’s net investment income for the year, or the amount by which the taxpayer’s modified AGI exceeds a threshold amount listed below. Net investment income includes income from passive sources like interest, dividends, annuities, royalties and rents, and net gain from the disposition of property. Income from a trade or business that is a passive activity to the taxpayer is included in investment income.
The threshold amounts are:
- $200,000 for unmarried taxpayers;
- $250,0000 for joint filers.
Born in Flushing, NY. Lived on Long Island in New York from 1955 to 1994. Lived in Sedona, Arizona from 1995 to 1997. Lived in Ventura, California from 1997 to 2008. Lived in Rimrock, Arizona from 2008 to Present. CPA, writer and musician. I play the accordion professionally. I speak French. Married with two cats. My wife and I own a house in Rimrock.