A retired Korean-American man, only identified by his last name Kim, recently opted to sell his property in South Korea. After buying the property for $100,000 in 2006, he recently sold it for $700,000 and paid for his real estate sales tax to the tax administration in Korea.
Kim’s transfer income tax imposed by the U.S. government-run Internal Revenue Service (IRS) was exempted, per U.S.-Korea Tax Treaty.
Soon after, however, Kim was notified of an unexpected $15,200 in Net Investment Income Tax (NIIT) stipulated by Obamacare. Much like Kim, many real estate sellers who invested in overseas properties still remain oblivious to the new tax law to this day.
Certified Public Accountants say that the IRS began imposing a tax rate of 3.8 percent on high-income earners net investment income as well as 0.9 percent on their Medicare tax. Prior to Obamacare, there were no Medicare tax on investment incomes, but the new law was created to secure wider source of revenue and to provide taxation equity.
That is where the NIIT is applicable to real estate investors. The NIIT’s applicability is complicated as the IRS imposes its 3.8 percent tax rate on whichever amounts to less sum between a real estate seller’s net investment and modified adjusted gross incomes.
Since Kim sold his property for $700,000 after buying it 10 years ago for $100,000, he made a marginal profit of $600,000. Unmarried individuals, such as Kim, is then imposed 3.8 percent of “Obamacare tax” on $400,000 of his profit that is separate from state of California’s 10 percent income tax rate.
“A lot of senior citizens who sell their properties in Korea are taken aback by the NIIT,” said Jang Joon, a Certified Public Accountant. “There are quite a few people who are holding off on selling their properties as President-elect Donald Trump already stated that he plans to abolish Obamacare.”
Another Certified Public Accountant Martin Park said, “Additional tax is obviously a burden on retirees as their income is limited.”
Despite President-elect Trump plan to disband Obamacare, many realtors believe that lack of alternate option will lead to at least two to three years before a new tax law is introduced.
“I have a property that I bought 15 years ago, but I’m going to wait and see until Obamacare is disbanded,” said one real estate investor. “For people whose income is limited, 3.8 percent tax rate is big.”
By Sung Cheol Jin