Currently, all individuals are subject to the 2.9 percent Medicare tax on any earned income. If you are an employee, your employer pays for half of this. President Obama’s Patient Protection and Affordable Care Act imposes new “Medicare” taxes effective January 1, 2013. This act increases the tax exposure on high income earning individuals by requiring them to pay another .9 percent on their earned income over $200,000 or $250,000 if married. The law also imposes a new 3.8 percent Medicare Surtax on at least a portion of investment income, such as capital gains, interest and dividends, as well as income from passive activities including rental income for people with the same income thresholds mentioned above. It’s double duty for high income earners.
If you are a qualified Real Estate Professional (in the eyes of the IRS), you may be able to classify real property rental activities as non-passive. This means that any income from these activities would not be subject to the 3.8 percent Medicare Surtax. In addition any losses from these activities could offset other sources of taxable income which would result in lowering your overall adjusted gross income below the thresholds mentioned above and potentially avoiding the 3.8 percent Medicare Surtax on other sources of investment income.
Also download our Real Estate Professional Qualification Flow-chart Test and our Material Participation Flow-chart Test