Real Estate Forum: Is there a 3.8 percent house sales tax in the health care bill?
October 12, 2012
Question: Allison, we have heard that there is a housing tax included in the health care bill. We are trying to sell our home this year and we are concerned this will be a huge tax for us. What do we need to know?
Answer: The presidential election has renewed the debate about the administration’s health care bill. I have received many questions about a possible 3.8 percent tax on home sales in the bill. The following is some information that should help clear up the questions for you. “Keeping Matters Current” is the source for the following information:
I am certainly not an accountant and give you this information just as a simple answer to the misconceptions. Please always remember that when it comes to IRS regulations, you should always check with your accountant for the most accurate and up-to-date information.
A little history on the confusion
Fact Check.org explains it this way:
The truth is that only a tiny percentage of home sellers will pay the tax. First of all, only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it. And even for those who have such high incomes, the tax still won’t apply to the first $250,000 on profits from the sale of a personal residence – or to the first $500,000 in the case of a married couple selling their home.
We can understand how this misconception got started. The law itself is couched in highly technical language that only a qualified tax expert can fully grasp. (This provision begins on page 33 of the reconciliation bill that was passed and signed into law.) And it does say the tax falls on “net gain … attributable to the disposition of property.” That would include the sale of a home. But the bill also says the tax falls only on that portion of any gain that is “taken into account in computing taxable income” under the existing tax code. And the fact is, the first $250,000 in profit on the sale of a primary residence (or $500,000 in the case of a married couple) is excluded from taxable income already. (That exclusion doesn’t apply to vacation homes or rental properties.)
The Joint Committee on Taxation, the group of nonpartisan tax experts that Congress relies on to analyze tax proposals, underscores this in a footnote on page 135 of its report on the bill. The note states: “Gross income does not include … excluded gain from the sale of a principal residence.”
And just to be sure, we checked with William Ahern, director of policy and communications for the nonprofit, pro-business Tax Foundation. “Some home sales would see a tax increase under this bill,” Ahern told us, “but it would have to be a second home or a principal residence generating [a gain of] more than $250,000 ($500,000 for a couple).”
The following simple explanation comes from midiShaw:
The tax will affect those sellers of real property who will be otherwise taxed on capital gains under current tax laws. Under current laws, if you sell your primary residence and meet the ‘time ‘ criteria, you are exempt up to $250,000 or $500,000 (filing individually or jointly). Any amount realized OVER that amount is taxable under current tax schedules based on income. As such, this new tax will apparently be added to the current capital gains tax burden IF your income is over $200,000/$250,000 (filing individually or jointly). For those selling second homes and investment properties, the tax, once again, will be applied to the amount of gain realized.
We offer this just as an explanation. Remember, when it comes to IRS regulations, you should check with your accountant for the most accurate and up-to-date information.
Here are the details in simplest terms:
Here are the 10 things you need to know about the 3.8 percent tax according to the National Association of Realtors (NAR):
1.) When you add up all of your income from every possible source, and that total is less than $200,000 ($250,000 on a joint tax return), you will not be subject to this tax.
2.) The 3.8 percent tax will never be collected as a transfer tax on real estate of any type, so you’ll never pay this tax at the time that you purchase a home or other investment property.
3.) You’ll never pay this tax at settlement when you sell your home or investment property. Any capital gain you realize at settlement is just one component of that year’s gross income.
4.) If you sell your principal residence, you will still receive the full benefit of the $250,000 (single tax return)/$500,000 (married filing joint tax return) exclusion on the sale of that home. If your capital gain is greater than these amounts, then you will include any gain above these amounts as income on your Form 1040 tax return. Even then, if your total income (including this taxable portion of gain on your residence) is less than the $200,000/$250,000 amounts, you will not pay this tax. If your total income is more than these amounts, a formula will protect some portion of your investment.
5.) The tax applies to other types of investment income, not just real estate. If your income is more than the $200,000/$250,000 amount, then the tax formula will be applied to capital gains, interest income, dividend income and net rents (i.e., rents after expenses).
6.) The tax goes into effect in 2013. If you have investment income in 2013, you won’t pay the 3.8 percent tax until you file your 2013 Form 1040 tax return in 2014. The 3.8 percent tax for any later year will be paid in the following calendar year when the tax returns are filed.
7.) In any particular year, if you have no income from capital gains, rents, interest or dividends, you’ll never pay this tax, even if you have millions of dollars of other types of income.
8.) The formula that determines the amount of 3.8 percent tax due will always protect $200,000 ($250,000 on a joint return) of your income from any burden of the 3.8 percent tax. For example, if you are single and have a total of $201,000 income, the 3.8 percent tax would never be imposed on more than $1000.
9.) It’s true that investment income from rents on an investment property could be subject to the 3.8 percent tax. But: The only rental income that would be included in your gross income and therefore possibly subject to the tax is net rental income: gross rents minus expenses like depreciation, interest, property tax, maintenance and utilities.
10.) The tax was enacted along with the health care legislation in 2010. It was added to the package just hours before the final vote and without review. NAR strongly opposed the tax at the time, and remains hopeful that it will not go into effect. The tax will no doubt be debated during the upcoming tax reform debates in 2013.
Hope that answers your questions! The bottom line is that yes, there is a tax included in the bill, and it really doesn’t amount to as much as you might have thought.
For answers to your real estate questions, call Allison Simson at (970) 468-6800. Email Info@SummitRealEstate.com. Her philosophy is simple, whether buying or selling, she understands that the most important real estate transaction is yours. Want to know the value of your Summit County property? Visit http://www.SummitHomeValue.com.