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3.8% Real Estate Tax

INTERNET CLAIM: The 2010 Healthcare bill includes a provision that would implement a 3.8% real estate sales tax in 2013.

The Claim is: FALSE

There is a good chance you have been forwarded an email claiming that a new tax designed to pay for medicare will essentially be a 3.8% sales tax on real estate. Many of these emails use an example of a $400,000 home being sold resulting in a $15,200 tax. That is not the case at all. While there is a tiny nugget of truth in the emails, rest assured the way it is described is completely false.  

So, what is really in the bill?

There is a new Medicare tax implemented in 2013 and it is 3.8%. But that is the only bit of truth in those viral emails. What it doesn’t point out is that the new tax is only on what they call “unearned income” and only on those they categorize as “High Income” taxpayers.

To qualify as a high income taxpayer, your AGI must be more than $200,000 for a single filer or $250,000 for married couples. Also, remember that this only applies to what the bill calls “unearned” income which they define as income derived from investing capital – including capital gains, rents, dividends and interest income. The taxable amount is reduced by any expenses associated with earning that income. For example, for rental income the taxable amount would be gross rents minus all expenses (including depreciation) incurred in operating the rental property.

Another thing that is important to understand is the NAR and RPAC fought to ensure that the $250,000/$500,000 exclusion on the sale of a principle residence WILL continue to apply. So a client of yours sells a their principal residence and nets a gain and qualifies as a “high income” taxpayer – they would still not be subject to the new tax as long as the homes sale was less than $250,000 for a single taxpayer or $500,000 for a married couple.

Finally, the formula for the application of this tax is complex, but there are 2 different figures to look at – the amount a taxpayer’s AGI exceeds the high income levels ($200k/250k) and the taxable net investment income. The 3.8% tax would apply to the lesser amount. Meaning, if a married couple has a AGI of $260,000 but sells a rental property and nets $60,000 in “unearned income,” the 3.8% tax would only apply to the $10,000 their AGI exceeds the high income level. It would not apply to their $60,000 net investment income.

So, if you sell your home for $400,000, there is no way you would have to pay a $15,200 tax. In fact, if you are a married couple and it is your principle residence, you wouldn’t have to pay anything due to this new tax. If you were single and earned more than $200,000 you would be subject to some tax, but the amount would be applied to either the amount their AGI exceeded the income levels or the net gain from the home sale – whichever is less.

It’s still a new tax and not ideal, but it is in no way as crippling as the one described in the emails that get sent around.

Taxes like these are a great example of why it is important to contribute to the REALTORS® Political Action Committee. RPAC protects your business and your clients from harmful legislation at all levels of government. For more information, visit www.mibor.com/rpac.

MORE RESOURSES: Fact Sheet put together by the National Association of REALTORS®

MORE QUESTIONS: Contact Lex Fay at 317-956-5250

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