Hidden in the Healthcare Bill that Congress passed this year is a 3.8% Medicare tax on passive income, like rent. Currently, investors who make a return on their savings or real estate investments (passive income) paid only income taxes or capital gains taxes, on their gain.
Under this new provision, the investor will also be liable for a 3.8% Medicare tax on top of it all.
The real estate market is in bad shape, and many landlords are struggling just to avoid foreclosure while paying for basic repairs. The average landlord will not be able to absorb a 3.8% additional tax on the rents they collect; they will have to pass that tax on to their tenants in higher rents.
If the tenants cannot pay the increased rent, and landlord cannot afford to absorb it, we will see even higher rates of foreclosures, as these small landlords will be forced out of the market.
More foreclosures, especially among landlords, means fewer rental units available for those who cannot purchase their own homes, and more empty housing in our communities. More housing for sale drives housing prices down even more.
Government action often has unintended consequences. Basic economic truth dictates that higher taxes on any activity discourages that activity. Do we want to discourage landlording and investing?
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