The Facts about the 3.8% Real Estate Tax in Health Care Law
You might have heard rumors or received e-mails stating that all real estate sales would have a new tax in 2013 due to the passage of the Health Care Law. Here are the basic facts:
- Yes, there is a new 3.8% tax that is part of the recently passed Health Care Bill.
- Yes, this new tax comes into effect January 1, 2013.
- No, this is not a transfer tax that will be charged on all real estate sales.
- The tax will only impact individuals who have more than $200,000 adjusted gross income (AGI) and joint tax filers who have more than $250,000 AGI on their joint tax return.
- Those who do have incomes above these amounts will only be impacted by this new 3.8% tax if they have certain types of investment income.
- The investment income types that are impacted by the new tax are:
- Net Capital Gains
- Net Rental Income
- Interest and Dividends
- Only the profit of Net Capital Gains above the current tax-free exclusion of $500,000 (for joint tax payers) and $250,000 (for an individual tax payer) will be subject to the new tax.
The National Association of Realtors® tax staff provided the following example of how the 3.8% tax might affect a consumer next year:
Say you and your spouse have AGI of $325,000 and you sell your home and net a $525,000 profit. Assuming you qualify, $500,000 of that gain is wiped off the slate for tax purposes. The $25,000 additional gain qualifies as net investment income under the health-care law, giving you a revised AGI of $350,000. Since the law imposes the 3.8% surtax on the lesser of either the amount that your revised AGI exceeds the $250,000 threshold for joint filers ($100,000 in this case) or the amount of your taxable gain ($25,000), you end up owing a surtax of $950 ($25,000 times .038).
The 3.8% levy can be confusing, and it can bite deeper when your taxable capital gains are far larger or you sell a vacation home or a piece of rental real estate, where all the profits could subject you to the investment surtax.
I suggest speaking with a tax professional for advice on any specific situations.
by Judy Jones