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The 3.8% Tax Is Not a Real Estate Transfer Tax

By Robert Freedman, Senior Editor, REALTOR® Magazine

Shortly after the federal government enacted sweeping healthcare reform earlier this year, there was considerable concern over a last-minute addition to the legislation: a 3.8 percent tax on investment income of upper-income households to help shore up Medicare. The tax takes effect in 2013.

Among the concerns expressed among consumers and business people, including real estate professionals, both then and today, is that the tax amounts to a transfer tax on real estate. Not true, NAR Director of Tax Policy Linda Goold says.

Here’s how the tax works. For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. I say “might” because whether the tax applies or not depends on many factors having to do with the kind and amount of the investment income the household receives.

Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income.

Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.

Let’s take a look at a married couple that has $325,000 in adjusted gross income (AGI), plus $525,000 in capital gains from the sale of their house.

This household would be considered upper-income by most standards. Not only is their income relatively high, at $325,000 (adjusted gross income, or AGI), but they’re receiving a $525,000 gain on their house sale. Presumably, they bought their house years ago and it’s appreciated over the years, so upon selling it, their gain is a relatively high $525,000.

For this household, only $25,000 in investment income would be subject to the 3.8 percent tax. That would amount to $950. That’s because it’s the $25,000 over the $500,000 capital gains exclusion that’s taxable.

Before they would know that, though, they would have to do a calculation that involves their adjusted gross income. They would have to add their capital gain of $25,000 to the amount of their income above the $250,000 income trigger (for married couples).  Since their income is $325,000, they would add the $25,000 to $75,000 ($325,000 – $250,000), which would equal $100,000. Then they would compare the $25,000 to that $100,000, and apply the tax to the lesser of the two, which is the $25,000. Thus, $25,000 x 3.8%  = $950.

So, you have a household that had income of $850,000 for the year, and its tax on investment equaled $950.

This is a simplification. Other tax issues could come into play. But it shows that the tax applies to just a portion of investment income for certain upper-income households and that the capital gains exclusion remains untouched.

Nobody likes taxes, and this tax was inserted into the legislation at the 11th hour as a “pay-for,” that is, as a revenue generator to help offset some of the costs of the reform. It’s expected to generate $325 billion over eight years.

NAR has prepared a brochure that looks at how the tax might apply under eight income scenarios: 1) sale of principal residence (which we just looked at), 2) sale of a non-real estate asset, 3) gain, interest, and dividend from securities, 4) real estate investment income, 5) rental income as sole source of earnings, 6) sale of second home with no rental use, 7)  sale of inherited investment property, and 8. purchase and sale of investment property.

You can download the brochure for free. It’s written in plain language and I think you’ll find it organized efficiently, so you can see at a glance the potential considerations for the different scenarios. Of course, it’s just guidance: each household’s situation will be different, so you would want to suggest to your customers and clients that they consult with a tax advisor to make sure the tax is applied correctly in their case.

You can also get a good sense of how the tax works in the video above, in which Goold walks through a sample income scenario.

Robert Freedman

Robert Freedman is manager of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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Comments
  1. Barbara Elfers

    Okay, I read the above. I don’t see how you can say that it isn’t a transfer tax. There appears to be different calculations of the tax for different situations and income levels but no matter how you define it, it still occurs upon the transfer/sale of property. IMO, it is a transfer tax.

  2. Ron

    Barbara,

    What part of it are you confused by? It has NOTHING to do with transfer taxes. It Is a potential tax under certain gain scenarios on investment income profit. It’s a tax on investment income under specific and limited scenarios!

    Re-read it, then read the actual legislation. It should help alleviate the confusion.

  3. What I want to know is why is this such a HUGE concern to everyone? When was the last time your average real estate agent sold a home $500,000 above the initial purchase price? I would say at least 90% of sales are for homes less than $500,000 for the ENTIRE HOUSE!

  4. Brad Reese

    I am a Real Estate Broker. For over 50 years I specialized in Income Tax Preparation.
    My comment is this:
    If it walks like a duck, swims like a duck, quacks like a duck and looks like a duck.
    IT MUST BE A DUCK!

  5. Tiann

    It’s another tax. Pure and simple. It is another tax to subsidize health care. Who will pay? We will pay. The American people will pay no matter what your income level. This is not a class issue. It is Americans giving up there rights and MONEY.

  6. Tax is a Tax is a Tax NAR needs to stop playing along with the spin and tell the truth this is all about steeling from the public and making it look like there doing us a favor. Fannie Mae and Freddie Mac need to be held to the same ethic standard as Realtor. They’re always and forever putting them selves on higher level. While stealing. Why are they still in business.

  7. Connie Vanderpool

    if it helps the country and those in need. I am for it. I think this will be easier than what everyone is anticipating.

  8. Franklin E. Dennis

    “The camel has his nose under the tent-soon he will be inside”. This real estate transfer tax, it seems to me ,will be like the alternative minimum tax which over time came to affect working folks like you and me.Now the AMT is such a significant source of revenue, Congress is not inclined to take the sting out of it. Don’t you people ever write to your Congressmen about this screwed up tax system that just keeps on rolling along like the Missippi River. Do you have any idea of the amount of this great nation’s resources are wasted complying with this Rube Goldberg mess called the Internal Revenue Code ?

  9. It is a shell game. The government is out of control spending and taking money from where ever it can. Under L. Johnson, President, the government grabbed the Social Security money for the governments use and thereby set that system up to eventual fail as it will run out of funds. The government now is taxing those that are producers and next it will be all of us that are the remainders of the private sector that will be taxed. Beyond this, to cover the annual shortfall, the government borrowers the rest and now we are 14 Trillion Dollars upside down and growing bigger each year. “Solution”, shrink the government by closing its agencies, such as Department of Energy just to name one of many. Go to Google and pull up these agencies to see the bizarre list of useless performers. And we pay and pay and pay for it. Home Land Security is a joke. It was not needed. We had other in place means of taking care of this security situation and the Coast Guard as one solution would have been a natural at airports and boarder control. But no, the Government took advantage of a serious situation to once more expand and grow and control.

  10. It’s a TAX. And what does real estate have to do with health insurance? Sooner or later, they will TAX everything, yet not call it a TAX. I wonder how we ever got along before this tax?

  11. Marilyn Green

    No Barbara. It is a tax on INCOME, and income that is derived from investment, regardless if it is from a large amount resulting from dividends, rentals, or real estate. Except that real estate enjoys a very high protected status. And by the way, did you ever consider it is a privilege to pay taxes, and be able to reap the benefits of doing business in a country that allows us to have a business, and not to have to pay off people with bribes in order to do business?

  12. Larry Patrick

    Nothing yet for us real estate brokers and/or investors to get too excited about. First, it’s not 2013 yet. Second, and most importantly, give the Republicans some time to iron it out. Some of them own a lot of real estate and some have direct and indirect family members that are brokers and investors. This duck is a lame duck.

  13. Rick

    Barbara

    What I want to know is where was NAR when all of this was going on. Not only the health care bill but but this 3.8 % tax has a negative impact on all independent realtors. All of this is going to have a negative impact on realtors and I for one am not happy with the lack of representation that the dues paying realtors are receiving. Maybe the administrative branch of NAR will get the message if we quit paying our dues.

  14. Taxing is taxing! No matter how one spins it. This is taxation of property owners. Our politicians continue to spend with out regard. No one rich or middle class should be burdened with more taxes!

  15. Brenda Gravitt

    the brochure would not download.

  16. Florence in Tucson

    Sooner or later this WILL become a federal “transfer sales tax” on ALL home sales, because this new tax (on “the wealthy”) will not generate enough revenues for our current administration, which just cannot or don’t want to stop their spending habits!

  17. David Holder

    Can someone please tell me where this new 3.8% tax can be found in the Patient Protection and Affordable Care Act? I’ve done word searches of the 906 page PDF and cannot find it any where. It is not in Section 1411.

  18. Rose

    Now I am really confused. I heared on the News that the 3.8% was a Sales Tax on the sales price of the house. Can any one get the real facts and let me know what the hell the truth is…lol.
    I just sold a home I am waiting to get hamered by the State, Feds, and anyone else that wants to put their hands in the little tiny pot. OMG sometimes I hate living in California.

  19. Robert Freedman

    Thanks for your question. The 3.8 percent tax isn’t a sales tax on real estate. It’s a fee on a portion of investment income for high-income households that goes to Medicare. It applies, starting in 2013, to a small portion of the investment income that’s realized by a narrow band of taxpayers. It doesn’t touch the vast majority of households selling their house. Before the tax on investment income kicks in, the taxpayer has to earn at least $200,000 (as an individual) or $250,000 (as a married couple), and on top of that the capital gains exclusion on the sale of a house ($250,000 for individuals and $500,000 for married couples) remains in place. So, if a household meets the income floor, they still get all the capital gains exclusion on the sale of their house (up to the $250,000 and $500,000 limits). Then, on eligible investment income, there’s a tax for amounts over and above that capital gains exclusion. Thanks again for your question.
    Best,
    Robert Freedman

  20. Great. Good to know it isn’t actually a tax, nor does it hurt anyone who can’t “afford” it. It’s just a “fee” for millionaires and billionaires.

  21. Richard Lewis

    This blows me a away! It is a transfer tax or an additional capital gains tax no matter how you slice it. It only occurs upon the sale and transfer of real estate. Just like a transfer tax. It does not matter how many of these transactions we sell or not, it is an additional tax that was thrown on us and will affect the market. Such as the sale of a ranch held for many year by a family and the net proceeds are are far more than the 500K exclusion. Its theirs. It is their retirement. Who says its OK just because its on on the so called wealthy. Who defines that line? Sounds like some talking points I have heard many times from the far left trying to divide this country. If it sounds like a duck and walks like a duck. It is a duck.

  22. Nevada Metherd

    This is another tax on real estate to punish EVERYONE who owns real estate (you are wealthy if you own R.E.) The tax is a “redistribution of wealth.” It is supposed to go to Obamacare, like social security was supposed go to people who put the money in, and the S.S. money ended up being used in the general fund for all kinds of goodies here and all over the world. Meanwhile Obamacare is taking a half-trillion dollars from social security and seniors over 50 needing hip replacements, heart surgery, etc. will be RATIONED…already in the works. REALTORS TELL YOUR CONGRESS PEOPLE TO KILL THIS NO GOOD DEAL NOW! The duck needs to be taken out of the house. Mad-as-hell-in-Reno.

  23. Don Duncan

    Marilyn: No, I never did consider it a privilege to pay a tax anymore than I consider it a privilege to be robbed, raped, or controlled. What difference is there between a bribe and a tax? Both are paid under duress. Both are extortion. Both are immoral. Also, you seem to celebrate being “allowed” to operate a business. Did YOU ever consider it a RIGHT? The right to life is only meaningful if you have the right to work. Life requires production. When government violates property rights it violates the right to life and invalidates any moral claim to exist. Our government was created to protect our rights, and has no other function. Our politicians have forgotten that and need to be removed.

  24. How about if we all just calm down and revisit this on January 1st, 2014 and after a year of the tax being implemented, we all list and name our clients that sold property and actually paid the tax on the profits. I don’t think there will be too many entries.

  25. Tom English

    Do you think posting “[...] The 3.8% Tax is Not a Real Estate Transfer Tax (Nov. 19) [...]” over and over and over again will not make it a tax. Sorry, call it what you want, but it’s still a tax … it’s still a tax …it’s still a tax … it’s still a tax …it’s still a tax … it’s still a tax …it’s still a tax … it’s still a tax …it’s still a tax … it’s still a tax …it’s still a tax … it’s still a tax …it’s still a tax … it’s still a tax … and over and over and over again.

  26. Mike Hume

    It is a tax. Those numbers can change with inflation to affect everyone. When I started there were few sales over $100,000. in my market. In less than 20 years there were few sales under. Depending on the market, recovery could easily change the numbers significantly and a majority of sellers might qualify on a set income and gain. If you say it isn’t a tax it will be in a short time. It is a tax.

  27. Donna Hodge

    Yes it is a tax. No it is NOT a Real Estate Transfer Tax. I live in a state with something called Real Property Transfer Tax, which is a Transfer Tax, which is charged on the sale price, making no exemptions or reference to income, the $250,000/500,000 exclusion, or the income of the seller.

  28. Donna Hodge

    In fact, now that I think of it, our transfer tax is based on nothing but the sale price. Lose you shirt on the house, too bad. The transfer tax is still collected at closing. Our market is 75% short sales and reos. Everyone is losing, the bank, the seller, sometimes the agents take hits on their commissions, etc., but that makes no difference, that transfer tax still has to be paid. It’s extremely regressive.

  29. Brenda

    It is a TAX..as Tom has expressed! And since it is a tax that happens when you sell or transfer ownership it is a TRANSFER Tax…just because it only hits higher earners -does not mean it is not a TRANSFER Tax, or that it is “right”…. this will be a disadvantage to the real estate market! All investors will calculate this into the purchase of investment property – and if the profit margin is reduced significantly by the 35% capital gains tax + an additional 3.8% transfer tax – these same investors may look to other investments. Most investors buy foreclosures and spend money on remodeling and repairs….helping the economy – this will affect the reduction of inventory from the market and it will affect the repairing of these properties.

  30. For all of those above who said “it is a tax” I applaud you. For all who feel they can justify this tax because “it will only affect a few”, I say shame! Regardless of the number of “transactions” that are affected – there are PEOPLE behind those transactions that worked hard to earn what they earn; to make wise investments into their future. Why should they be penalized for that? For too long the mind set that it is OK to “tax the rich” has been running rampant. Mind you – I am NOT rich – so I am not coming from a self-preservation stand point. I am coming from a social economic stand point. If there are people who can afford the million dollar homes, the $4,000 chandeliers, the expensive cars – I say “Thank God!” because every one of those items I just mentioned are built by people just like me – laborers, middle-income family providers. We have no right to penalize anyone for making more money than another – that, my friends, is Socialism. Isn’t it also the American Dream? When did we lose the right to attain that?

  31. ron futch

    Call it what you want, it’s just another way for the goverment to get money out of people. They will never learn the lesson we have to live by, you can’t spend more than you make !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  32. Ron Romanowich

    Tax or Transfer Tax either way, whatever the name a little nibble now. Minimal Inpact on Real Estate today a bigger bite later. Get use to it and as history has shown it will not be repealed, just become more extensive and expanded to possibly some portion of the upper income brackets, none of the lower bracket, but as it generally evolves as time passes, the Fee, Tax or Transfer Tax or anyother renaming of the levy, right from the pockets of the middle income earners. An 11th Hour Addition, Learn to Love it.

  33. So,NAR has checkened out on fighting this tax ??!! Again.
    The only reason I’m still a Realtor is that I am forced to in order to access the local mls service. What a rip as is the lack of courage by NAR.
    This is a tax…………And it WILL be a transfer tax on lower priced properties.
    It’s just one more way the government,namely Comrad Obama is using the power of the federal government to take individual property rights away and shift all property ownership to the federal government. One more step to toal take over by the socialists.

  34. Paul Breit

    What part of tax don’t you understand? Not only is this a tax, it is an income specific tax! Let’s ALL hope that the US Supreme Court repeals the unconstitutional tax! If this is allowed to stand, what will the US Government “mandate” next?!?

  35. Marsha Cederquist

    Hi , OnTom English’s comment, he did not say it wasn’t a tax. He just said it is not a real estate transfer tax….and it isn’t.

  36. Tanya

    If wealthy people can get tax cuts when things are good (oh, and when things are bad….e.g., while fighting 2 wars int he Middle East) then they shouldn’t mind having to pay more when we are in a recession. If trickle down economics really worked, then we never would’ve found ourselves in this mess considering the wealthy have received tax break after tax break since 1980! There is an inverse relationship between the health of the economy and the tax rates of the wealthiest Americans. That is a fact.

  37. Shawn

    Shame on Tanya. You need to do your homework. “trickle down” works. Gov’t spending, poor federal budgets, and lazy Americans who look for handouts…. That is our problem. Tanya’ why is it better to give our money to the Gov’t rather than keeping it in the open markets?

    Reagan nailed it! “it’s not the tax payers aren’t paying enough taxes, it’s that government SPENDS too much!”

    Stop doing the “rich don’t pay enough” game! We pay nearly 90% of all federal income taxes, how much more should we pay? And yes, I am in that group of “wealthy Americans”. Instead of trying to break me, you should try to join me! Our country would be better off!

  38. Jan

    A tax is a tax is a tax. Call it whatever kind of tax you want, it is still a tax. The government better get their hands out of taxpayers pockets because the next (or continuing to get worse) depression is at hand. Government needs to stop spending!

  39. Gayle Mason

    Amen! Laura Kennedy…..
    A TAX is a TAX no matter what you call it and it is attached to real estate. It will effect all of us in some way or another. Wake up people!
    The Governement needs to be smaller and stop spending out of control. Reduce the Government payroll and you will save millions in s short period of time.

  40. This makes my blood boil. To think NAR just caves in. This is a tax. A tax on Real Estate. Have been a NAR member for 44 years. It is time we got some people on staff to fight for us. The regulation has to stop. If this is not a transfer tax at 3.8% strange how it will bring in Billions to pay for healthcare. The Camel has his nose under the tent.

  41. A couple of comments. First, the very fact that this is a “tag on” “11th hour pay for” to Obama Care (an oxymoron) is not only a sneak attack by the gutless left but a tax on those who work hard, invest money, create jobs and commerce across our great Country. Those who take risks deserve reward. Our country is built on Americans who are not afraid to step out with new ideas, risk loss to anticipate gain and go for it. There is a little bit of waist in government spending I think we can all agree. There are areas where money can be shifted from the taxes we all pay now to offset costs of the reform.
    Second, the example given in the article does not sound like much money in additional tax to pay. The fact is, how many taxes rates have not gone up once they are set in place. This is a foot in the door to increase the taxes in the future. The “Normalcy bias” is a part of Americas culture now. Once we get use to the shock of this tax, its easier for the powers that be, to increase little by little and suck more of the life out of our already floundering economy. Wake up people. When laws are passed without the our elected officials even reading them, skullduggery is on the horizon. enough said!…Damit!

  42. Alberto Alphonso

    I understand that it is not a direct transfer tax, but could be taxable income. Here’s the important thing to remember… the people to constructed this abomination of a health care act are desperate for money to pay for it. This is just the start of the many ways they will use to try and get the money.

  43. Good information on video….might want to use mic’s in the future though. It will definitely improve sound quality.

  44. Robert Freedman

    Eric, I appreciate your observation about the audio. We used a boom mic that’s about three feet from the speakers, just out of camera range, and on my computer the audio is great. I can hear it clearly from my external computer speaker on just the first volume notch. On the third volume notch (out of 16 maximum) it’s really loud. So, at least on my computer, I’m not hearing the audio issues. But I’ll see if it’s an issue for other people. Thanks.

  45. Chris Buss

    Am I correct in saying that this is a non-real estate tax on some real estate transactions or would it be better to say that there are some real estate transactions that may be subject to a non-real estate tax?

  46. Robert Freedman

    It would probably be most accurate to say it’s a tax on investment income that could include a small percentage of home sales among some high-income households. Thanks for your question.

  47. Christina

    Bottom Line: If you purchased your home wisely in the New York area and it has appreciated more than $500,000, you WILL pay a tax on the appreciation. This will impact MANY homes in communities near New York City (NY, NJ and CT) and other home markets where even starter homes are priced in the $600-700 thousand range. Of course the real estate associations want to minimize that impact to reduce potentially chilling the markets that they serve. Good luck!

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