Tax Increase on Rental Income Looming in 2013 for Passive Real Estate Investors

According to this article in the Wall Street Journal, passive real  investors are likely to see an increase on rental income:

The tax won’t affect real-estate companies or those who work full-time managing their real-estate portfolio. But so-called passive investors—those who dabble in real estate part-time but have other jobs—could be subject to a 3.8% surtax on rental income from the properties.

The tax, which was included in the Affordable Healthcare Act passed by Congress in 2010, is intended to raise funds to pay for the law. It covers all types of investment income, not just real-estate income. But the rules regarding real-estate investors, including guidelines that determine who is and isn’t a passive investor, remain in contention. And that is causing confusion and anxiety…

The tax applies to income received from rental properties for single individuals whose net income exceeds $200,000, and $250,000 for married couples. A nuance of the code applies the tax to either a person’s net investment income or the amount the adjusted gross income exceeds these thresholds, whichever is less.

A key exemption includes people who can verify that they spend over 500 hours a year, or roughly two hours a day, managing or operating their properties or who are real-estate professionals managing rental properties as a business or for their livelihood. This pool of eligible tax payers is small.