How will President Obama's tax plan affect your real estate and other investments?

What exactly does the Obamacare Tax mean for you? Probably not as much as you feared. First off, it is not a sales tax on any piece of real estate sold. This was one of the biggest misconceptions when the law was first announced and scared many people as to the fate of the real estate market if that were the case. However, it is not. It is simply an additional 3.8% tax on "net investment income" if your adjusted gross income is in excess of $200,000 for single taxpayers and $250,000 for married couples, or a trust or estate with income over $11,650. Net investment income includes short and long term capital gains, rents, annuities, royalties, dividends, and interest income. It is also important to note that the tax only applies to the unearned portion of income above the threshold. For example if your gross income is $300,000 and you have net investment income of $100,000, you will owe an additional $3,800. Before we examine the effects on your real estate, let's look at how it may affect your investment portfolio and what can possibly be done to reduce the tax. You might want to look at your active money manager accounts both on the equity and fixed income side. If you are over the threshold, all of the profitable trading activity, dividends, and bond interest will be subject to the tax. There a few ways to potentially reduce the tax. First, you want to look for ways to bring your gross income as low as possible. You want to make sure you are taking full advantage of retirement plan contributions such as 401ks, IRAs and Defined Benefit Plans. Depending on your age and occupation, you may be able to contribute six figures per year to these plans. The next step would be to consider keeping your actively managed and high income investments inside of your retirement plans and annuities where the investments continue to grow tax deferred, so are not subject to this tax. Lastly, you might want to consider looking at investments that are more passive in nature or that generate tax deferred income or grow tax deferred for your after tax money. Some examples might be managers that employ more passive strategies, REITs, alternative investments, life insurance or annuities. As for real estate, there is some good news. The first $250,000 if single or $500,000 for married couples, of profit on your primary residence is still exempt. However, for your investment properties, you will most likely have to pay the tax. This will affect your income from your rentals as well as the capital gains when you sell. Keep in mind this is net income, so gross rents less expenses such as depreciation, interest, property tax, maintenance, and utilities. The people most affected by this are those that have a very low cost basis on a piece of investment real estate. To give you an example, if you sell a $5 million property with a cost basis of $1 million, it will cost you an additional $152,000 in taxes. So, if you are thinking of selling a property with a low basis, it is more important than ever to consider a 1031 exchange. As with all capital gains, this additional tax will deferred by the exchange as well. If you are a real estate professional, you might be able to avoid this tax. I say might, because it depends upon your involvement with the property. If it is a triple net property, where you have very limited involvement, you will most likely have to pay the tax. However, if you have a building and are actively involved with the tenants yourself, you probably can avoid the tax on both the income as well as the gain when it is sold. If there is one thing about this law, it is not cut and dry, so get some good advice when examining your situation. To determine exactly how this tax will affect you on both an income and capital gain basis, make sure you have a very knowledgeable tax advisor to help you make the determination. Once you have figured out how this will affect you, it might be a good idea to get together with a seasoned financial advisor that can work with your CPA to see how to structure your portfolio to reduce future taxes. Michael Packman is CEO at PNI Capital Partners, Syosset, N.Y. He offers access to securities through J.P. Turner & Company, LLC, a nationwide broker/dealer and member of SIPC. J.P. Turner & Company, LLC and PNI Capital Partners are not affiliated.