If you sell a highly appreciated asset, there is a good chance you will be paying quite a chunk of your profit in taxes if you do not do any tax planning to defer those taxes.
Most people know about federal capital gains taxes. There are also state taxes in some states, like California, that also get a chunk of your gain. However, many investors might not know about another tax called the, “Net Investment Income Tax” (NIIT).
From the IRS.gov website:
The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.
The Net Investment Income Tax went into effect on Jan. 1, 2013. The NIIT affects income tax returns of individuals, estates and trusts, beginning with their first tax year beginning on (or after) Jan. 1, 2013. It does not affect income tax returns for the 2012 taxable year filed in 2013.
Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:
|Filing Status||Threshold Amount|
|Married filing jointly||$250,000|
|Married filing separately||$125,000|
|Head of household (with qualifying person)||$200,000|
|Qualifying widow(er) with dependent child||$250,000|
The NIIT is sometimes referred to as the “Obamacare Tax” as it was one of the many taxes included in the Affordable Care Act aka Obamacare. So the bottom line is that if you sell an appreciated asset like an apartment building and you meet the modified adjusted gross income amount you will be charged another 3.8% on your gain in addition to the 20% federal capital gains and 13.3% California ordinary income tax not to mention your depreciation recapture. That’s a quadruple whammy and is why it is so important to check with your CPA or tax advisor also check out some of the best tax planning or tax deferral strategies.
By the way I don’t give tax advice. I simply give tax awareness so you can be a bit more informed when it is time to sell your building.
For any specific questions about your situation please contact your tax advisor.
Do you have some questions about your property? Please contact me at firstname.lastname@example.org