Decoding the 3.8% investment income tax: a guide for La Jolla real estate owners


By Vicki Johnson

As of January 1, 2013, some forms of investment income will be subject to a new

3.8% investment income tax

  1. The exact parameters of this tax have sparked some confusion among La Jolla real estate owners and investors; and now the National Association of Realtors (NAR) has issued a brochure in response to clarify the matter. According to the NAR, the tax will not apply to all real estate transactions. However, it will be imposed upon some forms of income derived from rents, interest, dividends and capital gains.

The new investment income tax was put forward as a result of funding requirements that ensued after Congress failed to agree on tax law changes to pay for proposed adjustments to Medicare. As a result, the tax has been referred to as “the Medicare tax” since its projected $210 billion in proceeds is dedicated to the Medicare Trust Fund. Simply put, the 3.8% tax is, according to NAR, one imposed “on a portion of the money that you make on your money,” or what is sometimes referred to as unearned income.
In order to be affected by the new 3.8% investment income tax, individuals must have an adjusted gross income of at least $200,000 (or, if filing as a couple, a joint adjusted gross income over $250,000). For real estate owners who meet these criteria, the tax applies to the lesser of either the investment income amount or the excess adjust gross income.

The new tax may apply in the following scenarios:

  • Capital gains: sale of a principal residence, sale of a non-real estate asset, interests and dividends (securities)
  • Rental income: income sources including real estate investment income, real estate income as the sole source of earnings
  • Real estate sale: sale of a second home (non-rental), sale of inherited investment property
  • Purchase and sale of investment property

However, every case is different; and when the tax goes into effect in January,

La Jolla real estate owners

should get in touch with an experienced advisor to discuss their individual situations and plan accordingly for tax time.

To learn more about real estate investment taxes, get in touch with me,

Vicki Johnson

, today. Whether you are a new investor or a seasoned property owner, I have the local expertise to help you make a smooth transition into the New Year. Contact me via email at

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