Real estate professionals and some business owners will pay less Medicare surtax as a result of final Internal Revenue Service regulations announced in late November. But for many clients who are subject to the odious 3.8% levy on net investment income (joint filers with incomes topping $250,000 and singles making more than $200,000), little change arrived with the new rules. They generally adhere closely to proposed regs promulgated in late 2012.

Clients may rely on either set of rules for their 2013 tax returns, notes Mark Luscombe, a tax analyst at CCH, an information and software provider in Riverwoods, Ill.

One significant change is a new safe harbor for landlords who are real estate professionals under the tax code. These clients won’t owe the surtax on their rental income if they spend at least 500 hours per year on rental activities, a requirement many will find easier to satisfy than the proposed regs’ tests, says tax attorney Sam Levy, a shareholder in Greenberg Traurig’s Denver office.

“Now more than ever, people who own rental property should look into qualifying as a real estate professional,” Levy says. “It generally requires half of the client’s personal services and 750 hours per year in real-property businesses, which can include non-rental activities.”

Several changes will benefit owners who materially participate in their pass-through entities––i.e., partnerships, S corporations and limited liability companies. When a working owner such as a doctor lends to his business and receives interest, that is called self-charged interest, and it is not subject to the surtax if the doctor owns 100% of the practice, explains Robert Keebler, a CPA at Keebler & Associates in Green Bay, Wis. He adds that if he owns 75% of the practice, then three-quarters of the interest escapes surtax.

Similarly, the surtax does not apply to self-charged rent, where an owner rents personally owned property to an activity in which he materially participates.
Meanwhile, calculating the surtaxable gain when selling an interest in a pass-through entity has been simplified. Assuming the owner worked in the business, the IRS now says the surtax applies only to his gain on the entity’s investment assets, such as a building it owns and rents to other businesses, according to CCH’s Luscombe. This rule is actually contained in new proposed regulations that were issued concurrently with the final regs and which can be relied upon for 2013 returns.

For workers, there’s been a favorable clarification regarding NUA, or net unrealized appreciation, on employer stock purchased in a qualified plan. Suppose the company stock cost the client $10 and was worth $100 when she withdrew it from the plan upon retiring, and later it was sold for $140. The $90 NUA ($100 value at distribution minus $10 basis) is not subject to the 3.8% surtax, Keebler says, but the $40 post-distribution gain is.

Other new rules expand the use of net operating losses and capital loss carry-forwards to reduce clients’ surtaxable income. See the dense new regs at