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My understanding is that IRMAA is not permanent. It follows the two-year lookback. A friend and I were discussing the possible sale of his rental property, and that raised the question of what happens if a one-time capital gain pushes someone into a higher Medicare premium bracket.
From what I understand, if someone sells a rental property and has a one-time income spike, that higher income may show up in Medicare premiums two years later, but it should eventually fall back down once a lower-income year becomes the lookback year. The part that catches people is that a voluntary rental sale may not always qualify for an immediate IRMAA appeal, so you may have to ride out the higher premium for the affected year.
That is why timing matters. A one-time gain may be worth it, but it can still create a Medicare surprise two years later.
Yup, and so does an RMD.
My understanding of the IRMAA impact in two years after the year the gain is realized is the same as yours and Dan’s – typically a one year impact.
Other non IRMAA tax matters to consider –
The previous method of depreciation selected on a rental property may significantly impact the gain via the Section 1250 gain rules where the previous depreciation is recapture realized upon sale. Potentially, if your friend selected accelerated depreciation instead of straight-line depreciation then the sale may result in a portion of the gain being taxed at a maximum 25% federal income rate rather than lower capital gains rates.
Other elective tax considerations less frequently considered are installment sales which can defer recognition of gain based on current year collection of sale proceeds if the rental property is not being replaced with another rental property or a IRC 1035 like kind exchange if the current rental property is being replaced with a new rental property. The factors in such decisions and needed actions are beyond the scope of a simple blog post.
As the friend is potentially subject to IRMAA on the gain then the friend is over age 65 and consideration of holding the rental property to death is also a option where the person inheriting the property could get a partial or complete step up in tax basis upon death and could then be sold without gain.
Hope these thoughts help.
Bill
Jeff, my understanding is the same as yours. He may have to pay IRMAA for one year.
I will say, many times the capital gain on a rental is not as bad as one may think.