The other day a client told me she was worried if she didn’t buy a duplex before the end of the year, she’d have to pay a 3.8 percent “sales tax”.
Of course, she was referring to the provision passed by Congress as part of health care legislation last year.
To be frank, there’s a lot of misinformation around this tax, so let’s clear it up.
If you’re single and earn less than $200,000 a year from all of your revenue streams (including rental income), or married and combined you earn less than $250,000, you’ll never pay this tax.
If you sell your principal residence, you will still receive the benefit of the $250,000 capital gain exclusion if you’re single, and $500,000 if you’re a married couple.
If you make more than that on your residence, you would be taxed on any gain above the excluded amounts, but only if you earn more than the described income thresholds.
If you’re one of the lucky few who earns more than $200,000-$250,000, your investment income from rents could be subject to the tax. However, the rental income you report is net rental income. In other words, you’d only be taxed on the income you report to the IRS, which is calculated after you pay expenses, and take deductions for depreciation and interest.
In other words, if you qualify, it really shouldn’t be that much on a small multi-family property.
It’s also important to note this tax applies to all investment income, not just real estate.
If you’re a Minneapolis duplex buyer or seller, however, in all probability, you don’t need to worry about it.