Ever since health care reform was enacted into law more than two years ago, rumors have been circulating on the Internet and in e-mails that the law contains a 3.8 percent tax on real estate. NAR quickly released material to show that the tax doesn’t target real estate and will in fact affect very few home sales, because it’s a tax that will only affect high-income households that realize a substantial gain on an asset sale, including on a home sale, once other factors are taken into account. Maybe 2-3 percent of home sellers will be affected.
Nevertheless, the rumors persist and the latest version that’s circulating falsely say NAR is advocating for the tax’s repeal. But while NAR doesn’t support the tax (it was added into the health care law at the last minute and never considered in hearings), it’s not advocating for its repeal at this time.
The characterization of the 3.8 percent tax as a tax on real estate is an example of an Internet rumor, says Heather Elias, NAR’s director of social business media. Elias and Linda Goold, NAR’s director of tax policy, sat down for a discussion of how the tax works and how Internet rumors work and you can find their remarks in the 6-minute video above.
Goold says the tax will affect few home sellers because so many different pieces must fall into place a certain way for the tax to apply. First, any home sale gain (principal residence) must be more than the $250,000-$500,000 capital gains exclusion that’s in effect today. That’s gain, not sales amount, so you really have to reap a substantial amount for the tax to even come into play. Very few people are walking away with a gain of more than half a million dollars today, even in the high-end home market, so right off the bat only a few home sellers would be a candidate for the tax.
For the few households that do see a gain of more than the $250,000-$500,000 exclusion (that’s $250,000 for single filers and $500,000 for joint filers), only the amount above the exclusion would be factored into the tax calculation, and that would still only apply to high-income households, which the law defines as single people earning $200,000 a year and joint filers earning $250,000 a year.
So, if you are a households with annual income of $250,000 or more and you earn a gain of more than $500,000 on your house (again, that’s after the $500,000 exclusion), any amount of gain above the exclusion would be plugged into a formula to see if it’s taxable. If it turns out that it’s taxable, then the amount could be subject to the 3.8 percent tax. If the household had a gain of more than $500,000 but only earned $249,000 a year in income, the tax wouldn’t apply.
(Note that these are just hypothetical examples. To know if a case would really be subject to the tax, a professional tax preparer or tax attorney has to look at all the particulars of the tax filer’s case. Only a tax professional is in a position to say the tax is applicable, but the examples cited here could help you get a sense of how the tax works.)
The other thing about the tax worth noting is that, although it takes effect in 2013, any impact on taxes wouldn’t happen until 2014. That’s because the tax filer would do the calculation in 2014 for the 2013 tax year. Because it’s not a tax on a real estate sale but rather on a capital gain, it’s not calculated at the time of an asset sale, whether that asset is a house or something else. It’s calculated at the time the filer figures his or her tax.
This is all explained clearly in the video, so if you have questions about how the tax works, or if you’re still hearing rumors about the tax and you’re not certain of the accuracy of what you’re hearing, the video should prove helpful.
Tax time is nearing and once more rumors are circulating on the Internet and by e-mail that the health care reform law enacted two years ago includes a 3.8 percent transfer tax on real estate starting in 2013. That rumor is not true and NAR has material available to explain how that 3.8 percent tax works.
It’s a tax on a very narrow band of investment income for high-wealth households (those who earn $250,000 in a joint return or $200,000 as an individual) that could come into play on the sale of a house if the sales gain is more than $500,000 for a married couple or $250,000 for an individual.
Even in the unlikely event the sales gain is more than that amount, the tax would only apply based on other considerations having to with the household’s income and its tax situation.
The bottom line is, the tax, which was imposed to help shore up Medicare, will only hit some portion of investment income.
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.
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