The Real Story…
News and commentary about the real estate market and related topics.
Dave Parrish, ABR®, CRSA, CSP, GRI, ePRO®,REALTOR ®, RealtySouth
The opinions expressed here are my own and don’t necessarily represent those of HomeServices South.
New House Tax Rumors Are Misleading…
As if the market wasn’t already confusing enough… This week we have seen a rash of rumors and forwarded e-mails that report that there is a new tax on house sales that is a part of the Health Care Reform Bill passed earlier this year that will impact all home owners who sell their home after 2012.
I have seen so many false claims circulated in this fashion that it has become a habit to check the facts at either FactCheck.org or Snopes.com.
First, the inaccurate rumor/claim:
3.8% tax on real estate transactions
Under the new health care bill – did you know that all real estate transactions are subject to a 3.8% “Sales Tax”?… [ I have omitted the balance of the sample e-mail, as it is purely political in nature ].
The problem with such claims that are partially true is that they misrepresent the real truth of the matter and are usually used to inflame the uninformed. A half-truth is still a lie.
A half truth is a whole lie. ~Yiddish Proverb
The most dangerous untruths are truths moderately distorted. ~Georg Christoph Lichtenberg
The truth, I encourage everyone interested to check the facts out for themselves, is that yes there is a provision in the Heath Care Reform Bill viz. Patient Protection Affordable Care Act (PPACA) health care legislation that calls for high-income households to be subject to a new 3.8% Medicare tax on investment income starting in 2013.
Now, the important fine print that was left out:
The PPACA will generally impose a 3.8 percent tax on the lesser of “net investment income” or the excess of modified adjusted gross income over a “threshold amount” (generally, $250,000 for taxpayers filing a joint return, $125,000 for married taxpayers filing a separate return and $200,000 in all other cases).
Net investment income generally means the excess of (i) interest, dividends, annuities, royalties, rents, income from passive activities, income from trading financial instruments and commodities, and gain from the disposition of certain non-business property, over (ii) allowable deductions properly allocable to such income.
In determining the amount of net investment income, special rules apply with respect to dispositions of equity interests in certain partnerships and S corporations, and to distributions from certain qualified plans. This additional tax applies to taxable years beginning after December 31, 2012
The tax is then not a tax on all real estate sales; it is an investment income tax, which could result in a very small percentage (estimated at less than 5%) of home sellers paying additional taxes on home sales profits over a designated threshold amount.
However, the existing exemption/exclusion of allowable gain (not the sales price) on a principle residence of $250,000 for individuals, or $500,000 for couples will protect the gains from the sale of a principal residence for more than 95% of Americans. Again remember this is a tax on gains that exceed the threshold and exemptions, not the sales price.
Note investment property and vacation homes do not have the exemption and will be subject to the tax if the gains are experienced by a tax payer exceeding the adjusted gross income threshold of $250,000 for taxpayers filing a joint return, $125,000 for married taxpayers filing a separate return and $200,000 in all other cases
In short, if you’re a “high earner” and you sell your home at a substantial profit, you might be required to pay an additional 3.8% tax. However, given that the existing home sale capital gains exclusion on a principal residence ($250,000 allowable gain for individuals, or $500,000 for couples) still stands and no Medicare tax will apply for gains within those limits, that the bill’s definition of “high earners” encompasses less than 5 percent of all taxpayers, and that the median sales price of existing single-family homes in the U.S. was only $170,700 in March 2010, the Medicare tax will likely affect only a small percentage of home sellers when it is implemented in 2013.
In a real practical sense, I could only wish that this were our most significant issue at the moment. Gains on real estate sales aren’t the problem that most concerns home owners today. That day will eventually return. And it is possible that some of us may gain enough on a sale to pay a tax. You should have such a problem!
This information is not meant to serve as tax advice. Remember, when it comes to IRS regulations, you should check with your accountant for the most accurate and up-to-date information, as it applies to your individual set of circumstances.
And oh by the way, make it a habit to check-out the facts first!
May the market be with you.
