Discussion:The 2013 Health care tax on passive income: rental real estate

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Discussion Forum Index --> Advanced Tax Questions --> The 2013 Health care tax on passive income: rental real estate

Discussion Forum Index --> Tax Questions --> The 2013 Health care tax on passive income: rental real estate

Hammock (talk|edits) said:

27 March 2012
When or if the tax is effective next year (on passive and portfolio income for high income taxpayers), will the tax be assessed on net rental income from

1. Real estate professionals net income

2. Self rental net income

My understanding is no on #1, but not sure on 2.

The question really is how is "passive" defined in the act, or better, is "trade or business" referenced to any code section?

Marcilio (talk|edits) said:

27 March 2012
Good point. I had completely neglected to consider those items for estimated tax calculations.

Trillium (talk|edits) said:

27 March 2012
From Sec. 1402 of HR 4872 (the reconciliation act), an excerpt to the language to be added as Sec. 1411 of Chapter 2A of Subtitle A of the Internal Revenue Code of 1986 (my bolding):

(c) NET INVESTMENT INCOME.—For purposes of this chapter—

(1) IN GENERAL.—The term ‘net investment income’ means the excess (if any) of—
(A) the sum of—
(i) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in paragraph (2),
(ii) other gross income derived from a trade or business described in paragraph (2), and
(iii) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business not described in paragraph (2), over
(B) the deductions allowed by this subtitle which are properly allocable to such gross income or net gain.
(2) TRADES AND BUSINESSES TO WHICH TAX APPLIES.—A trade or business is described in this paragraph if such trade or business is—
(A) a passive activity (within the meaning of section 469) with respect to the taxpayer, or
(B) a trade or business of trading in financial instruments or commodities (as defined in section 475(e)(2)).
(3) INCOME ON INVESTMENT OF WORKING CAPITAL SUBJECT TO TAX.—A rule similar to the rule of section 469(e)(1)(B) shall apply for purposes of this subsection.
(4) EXCEPTION FOR CERTAIN ACTIVE INTERESTS IN PARTNERSHIPS AND S CORPORATIONS.—In the case of a disposition of an interest in a partnership or S corporation—
(A) gain from such disposition shall be taken into account under clause (iii) of paragraph (1)(A) only to the extent of the net gain which would be so taken into account by the transferor if all property of the partnership or S corporation were sold for fair market value immediately before the disposition of such interest, and
(B) a rule similar to the rule of subparagraph (A) shall apply to a loss from such disposition.
(5) EXCEPTION FOR DISTRIBUTIONS FROM QUALIFIED PLANS.—The term ‘net investment income’ shall not include any distribution from a plan or arrangement described in section 401(a), 403(a), 403(b), 408, 408A, or 457(b).
(6) SPECIAL RULE.—Net investment income shall not include any item taken into account in determining self-employment income for such taxable year on which a tax is imposed by section 1401(b).

As always, links to the legislation are available from TA's main page articles; in this case: Health Care Act of 2010.

Harry Boscoe (talk|edits) said:

27 March 2012
OMG! Can't Congress find a term that **hasn't been used already**??

Choosing to use the phrase "trade or business" in this context is criminal.

Like, if they had used "Klingenfliegl" instead of "trade or business" it would have worked just as well. even better.

Think about it. If I'm wrong, please tell me so.

JAD (talk|edits) said:

27 March 2012
You're not wrong. It's almost as if someone really concentrated on how to make understanding the law as difficult as possible. Let's just assign random new definitions to existing tax terms to see if we can really drive the accountants nuts.

Trillium (talk|edits) said:

27 March 2012
Well, I dunno. After all, in new Sec. 1411(c)(1)(A)(i), they use "trade or business" in the heretofore "supposedly understood, but carefully and clearly by design never defined" sense. They then go on to apply special treatment to the subset of "trade or business" that is passive or trading in fin'l/commodities, etc.

So Sec. 1411(c)(2) doesn't really use "trade or business" itself to mean something new.... [trailing off....]

What I mean to say is... you are not wrong, Harry. In the big picture, at least.

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