Dear Liz: I sold a rental property this year and will have a long-term capital gain of about $100,000. My normal income usually puts me in the 10% tax bracket and my Social Security is not taxed because my total income is under $25,000. I pay $104 per month for Medicare. Will the sale of the rental property count as income and make my Social Security benefits taxable? Will I suddenly be deemed “rich” enough to pay more in Medicare payments? If so, will the Medicare payments go back to normal because I will have total earnings under $25,000 after 2014? I am 66, single and by no means rich.
Answer: This windfall will affect your Social Security taxes and your Medicare premiums, but the changes aren’t permanent.
The capital gain will be included in the calculation that determines whether and how much of your Social Security checks will be taxed, said Mark Luscombe, principal analyst for CCH Tax & Accounting North America. That will likely cause up to 85% of your Social Security benefit in 2014 to be taxable.
Your Medicare premiums are also likely to rise based on your higher modified adjusted gross income, said Jay Nawrocki, senior healthcare law analyst for Wolters Kluwer Law & Business. The income used to determine Medicare premiums is the modified adjusted gross income from two years earlier, so your premiums shouldn’t increase until 2016. If your income reverts to normal in 2015, your premiums should also revert to normal in 2017, Nawrocki said.
The exact amount you’ll pay can’t be predicted, but people with modified adjusted gross incomes under $85,000 paid $104.90 per month in 2014. Those with MAGI of $85,000 to $107,000 paid $146.90, while those with MAGI of $107,000 to $160,000 paid $209.80. If your income for 2014 puts you in that last group, you should count on your premiums roughly doubling in 2016.
There is some good news. You’ll qualify for the 0% capital gains rate on the portion of the gain that makes up the difference between your income and the top of the 15% tax bracket (which is $36,900 in 2014 for a single person). If your income is $24,000, for example, then $12,900 of your capital gain wouldn’t be taxed by the federal government. The remaining $87,100 would be subject to the 15% federal capital gains rate. You may owe state and local taxes as well, so consult a tax pro.
Liz — what “could” have been done if this persons Personal Financial advisor and CPA have been able to do to reduce their tax liability BEFORE the house was sold?
A 1031 exchange for another rental property could have deferred the gain…but if the reader wants out of the landord business, this wouldn’t be an option.
This is mainly correct, but the capital gains projections are off.
Since this was a rental property, there has been depreciation taken each year. This lowers the cost basis, so the reader may actually have a gain larger than $100,000. For example, if the property was purchased for $100,000, and sold for $200,000, and $50,000 has been claimed in depreciation over its life as a rental, then the total gain is actually $150,000, not $100,000.
Upon sale, if you have a gain, this amount of depreciation is considered “Unrecaptured Section 1250 gain” and is taxed at 25%, not 0% or 15%. Any gains in excess of the amount of depreciation is taxed as you say, at either 0% or 15%.
Let’s hope as a landlord the reader was smart enough to hire a CPA to help with taxes.