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.
[...] is a rumor; to get the real scoop, check out this link : http://speakingofrealestate.blogs.realtor.org/2010/11/24/the-3-8-tax-is-not-a-real-estate-transfer-t… Give me some feedback Share this:FacebookTwitterLike this:LikeBe the first to like this [...]
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.
[...] The 3.8% Tax Is Not a Real Estate Transfer Tax [...]
[...] Video and explanatory article. [...]
[...] Roger The 3.8% Tax Is Not a Real Estate Transfer Tax [...]
[...] The 3.8% Tax Is Not a Real Estate Transfer Tax [...]
[...] Video and explanatory article. [...]
[...] Just please understand who needs to be upset and who likely will not be affected. Here is a link to an article the National Association of Realtors have posted. Also, if you want a deeper [...]
[...] 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. Read More. [...]
[...] decide to sell. There are lots of other details in the bill so if you want to learn more you can check out this great article from Realtor Magazine. And if you have any questions feel free to give me a call or shoot me an email. [...]
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.
[...] The 3.8% Tax Is Not a Real Estate Transfer Tax. Share this:TwitterFacebookLike this:LikeBe the first to like this post. This entry was posted in Information, News and tagged 3.8% tax, Health Care Bill by Totsie Slover. Bookmark the permalink. [...]
[...] The 3.8% Tax Is Not a Real Estate Transfer Tax. Share this:TwitterFacebookLike this:LikeBe the first to like this post. [...]
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.
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.
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.
[...] and would suggest the same for this except there’s an even better source: the National Association of Realtors has addressed this with some facts. There’s short blog post and video that explains the tax in simple language. Again, [...]
[...] Additional information can be found at these links: 1) Frequently asked questions 2) Downloadable brochure 3) Video from National Association of Realtors [...]
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?
[...] the tax works in the video above, in which Goold walks through a sample income scenario. From: http://speakingofrealestate.blogs.realtor.org/2010/11/24/the-3-8-tax-is-not-a-real-estate-transfer-t… LegacySIR | No comments | Tags: coastal real estate maine, homes in maine, luxury real estate, [...]
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[...] The 3.8% Tax Is Not a Real Estate Transfer Tax. Share this:TwitterFacebookLike this:LikeBe the first to like this post. [...]
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 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
[...] http://speakingofrealestate.blogs.realtor.org/2010/11/24/the-3-8-tax-is-not-a-real-estate-transfer-t... [...]
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.
[...] The 3.8% Tax is Not a Real Estate Transfer Tax (Nov. 19) [...]
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.
[...] The 3.8% Tax is Not a Real Estate Transfer Tax (Nov. 19) [...]
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?!?