On July 13, 2017, the US Senate released an updated version of the Better Care Reconciliation Act of 2017. This is the Republican Healthcare Bill submitted earlier in June designed to overhaul or replace the Affordable Care Act (also known as the ACA or Obamacare). This new version would eliminate many of the taxes previously implemented to pay for the ACA. But, 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. Under the Affordable Care Act, taxpayers, estates, and trusts with income above statutory threshold amounts are subject to NIIT. The threshold is set at a modified adjusted gross income (MAGI) in excess of $200,000 (individuals) or $250,000 (married filing jointly). These thresholds are not indexed for inflation.
A 1031 Exchange Provides What the Republican Healthcare Bill Does Not
Gains on the sale of investment real estate, as well as interest, dividends, capital gains, royalty income – and more – are subject to NIIT. The Republican Healthcare Bill does not eliminate investment tax, but, 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 known 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 property must be held for investment or business use. Neither property can be a primary or secondary home.
- A qualified intermediary (QI) must facilitate the exchange. The QI must be in place prior to the sale of the property you are selling.
- The new property must be of equal or greater value that the net selling price of the relinquished property.
- You have 45 days after closing on the original property to identify up to three potential replacement properties. You have 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 experienced qualified intermediaries. We walk you through the process from start to finish, making your 1031 exchange an easy success.