On July 13, 2017, the US Senate released an updated version of the Better Care Reconciliation Act of 2017, the healthcare overhaul bill submitted earlier in June that was designed to replace the Affordable Care Act (also known as the ACA or Obamacare). Although this new version would eliminate many of the taxes previously implemented to pay for the ACA, it specifically leaves Net Investment Income Tax (NIIT) on the table.
Wait, what is the Net Investment Income Tax? The NIIT is an additional 3.8% tax on certain net investment income, including real estate. Enacted as part of the Affordable Care Act, taxpayers, estates and trusts with income above statutory threshold amounts are subject to the NIIT. For Individuals, the threshold is set at a modified adjusted gross income MAGI) in excess of $200,000 (individuals) or $250,000 (married filing jointly) and is not indexed for inflation.
Gains on the sale of investment real estate, as well as interest, dividends, capital gains, royalty income – and more – are subject to NIIT. Investors take heart; the law and IRA regulations provide a way to avoid paying the Net Investment Income Tax through a like-kind exchange, also referred to as a Section 1031 exchange. And the news gets better from there. With a 1031 exchange, real estate investors can defer and possibly eliminate a number of taxes including capital gains tax and the NIIT.
What do you need to know to take advantage of a 1031 exchange?
- Both the property for sale and the new investment property must be held for investment or business use and cannot be a primary or secondary home.
- You must use a qualified intermediary (QI) to facilitate the exchange and it must be in place prior to the sale of your relinquished property (the property you are selling).
- You must purchase property of equal or greater value that the net selling price of the relinquished property.
- You have up to 45 days after closing on the to identify up to three potential replacement properties, and up to 180 days following the sale of the relinquished property to close on all intended purchases.
For more information on 1031 exchanges, contact Midland at (866) 839-0429. Our expert staff includes multiple qualified intermediaries who will walk you through the process from start to finish, making your 1031 exchange an easy success.