Clarification on the "3.8% Real Estate Sales Tax"

There are emails circulating and posts elsewhere on the internet about a 3.8% real estate tax in the Health Care Bill (HR 3200).  This tax is described as something that ALL homeowners will have to pay when they sell their homes.

Well, like many other things floating in cyberspace, this is not quite the whole story and it is very misleading.  I first heard about this after one of my clients asked me when the "national real estate sales tax" was supposed to take affect.  I was a bit skeptical about it, because I receive plenty of real estate-related news and information from the national, state and local real estate boards, and other sources, and I had never heard anything about this.

So, this is what I've learned....

The Facts about this tax

• There is a new 3.8% tax in the bill.
• It is not a "sales tax" on all real estate transactions.
• It is a Medicare tax.
• Many people will not have to pay this tax.
• It is going to affect so-called "high earners."
• It is not going affect many people.
• The tax comes into effect in 2013.

Does it apply to you?

It depends on how much money you make, and how you are filing your taxes. These are the targeted taxpayers.

• married couples filed jointly, making over $250,000 annually
• married couples filing separately, and making over $125,000 annually
• and anyone else making over $200,000 annually

But this is only part of the story.

How is the tax calculated?

In one email, it says that on the sale of a $400,000 home, you would pay $15,200 as a real estate sales tax (3.8% x $400,000).  This is incorrect.  There are two incorrect assumptions in the email:

1. that the Medicare tax is based off of sales price alone and
2. it applies to everyone (which is false based on the "high earner" income requirement).

The tax is NOT based on the sale price of the home. It is calculated on the profit, the capital gain.  As investment income, the profit is the sale price minus the initial investment.  Additionally the tax is only on capital gains that exceed $250,000 for individuals and $500,000 for married couples filing jointly.

Ok, so let's go back to the $400,000 home.  You would only have to pay tax on the sale if you meet the income requirements AND if you are single, your gain would have to be at least $250,000 (if you are married, it would be mathematically impossible for you to be liable for the tax).

I hope that this clarifies things!

Thank you for reading.

To see any property for sale in the Chicago area, go to www.KarpRealEstate.com

I realize that this topic has political implications, the intent of the post is not to debate opinions about the health care bill, taxes, or politics in general.  My intent is to clarifythe misinformation about the taxes on real estate transactions, nothing more, nothing less.

 

Comments

[Discount Belstaff Blouson]

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

[homes for sale omaha ne]

I appreciate your input and corrections. You are absolutely right in saying that my advice is not intended to be the gospel, because I am not a licensed tax consultant. It may have been irresponsible not for me to clarify that I am not a tax and that the article is intended to be illustrative and not literally.

[Philippines real estate]

Thanks a lot for clarifying everything about the 3.8% Real Estate Sales Tax. Now I know that the 3.8% is not the sales tax.