Back in April of 2010, the massive health care bill was signed into law. In the final hours, lawmakers injected a provision to impose a 3.8% tax on the sale of some residential properties in some circumstances.
As often tends to happen, a whole lot of misinformation soon commenced to be spewed forth. Here we are, almost a year later and the misinformation continues to crop up from time to time. What I can recommend is for you to consult a property tax reduction services company to know more about any property taxes that you’re unsure of.
And as we enter into an election cycle, you’re sure to see more and more emails like this:
Some things to remember:
1) Don’t believe everything you read on the internet.
2) Or in an email.
3) Emails with five different text colors and three different type faces and two different font sizes should almost always be ignored.
Here’s the real scoop on this 3.8% tax
Yes, effective January 1, 2013 there is a POTENTIAL 3.8% tax that will be imposed on SOME income generated from SOME home sales.
No, it is not a “real estate sales tax,” or a “transfer tax” and it does not apply to every home that is sold.
In fact, the 3.8% tax will apply to very few people in very few circumstances.
Before I attempt to delve into the details, it should be noted IN BIG RED LETTERS: I am not a tax professional, nor do I play one on the Internet. In fact, I have zero desire to be a tax professional. As always, your specific tax questions should be addressed to a tax professional, not a real estate broker writing a blog post. SEEK PROFESSIONAL HELP.
If you read through the actual legislation, it is easy to see how so many people have screwed up what this 3.8% tax is really all about. Here is just a taste for you:
SEC. 1411. IMPOSITION OF TAX.
(a) IN GENERAL.””Except as provided in subsection (e)””
(1) APPLICATION TO INDIVIDUALS.””In the case of an individual, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax equal to 3.8 percent of the lesser of””
(A) net investment income for such taxable year, or
(B) the excess (if any) of””
(i) the modified adjusted gross income for such taxable year, over
(ii) the threshold amount.
(2) APPLICATION TO ESTATES AND TRUSTS.””In the case of an estate or trust, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax of 3.8 percent of the lesser of””
(A) the undistributed net investment income for such taxable year, or
(B) the excess (if any) of””
(i) the adjusted gross income (as defined in section 67(e)) for such taxable year, over
(ii) the dollar amount at which the highest tax bracket in section 1(e) begins for such taxable year.
(b) THRESHOLD AMOUNT.””For purposes of this chapter, the term ”˜threshold amount’ means””
(1) in the case of a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), $250,000,
(2) in the case of a married taxpayer (as defined in section 7703) filing a separate return, 1?2 of the dollar amount determined under paragraph (1), and
(3) in any other case, $200,000
Please, kill me now. Does that make sense to anyone?
Let’s try it in language normal people can understand
Rather than give myself a migraine trying to re-write the pages of gibberish produced by Congress and their batteries of lawyers, CPA’s and God only knows what else, I’ll let the National Association of Realtors (NAR) do the dirty work. Say what you want about the NAR, but they obviously have a vested interest in any legislation that could affect the real estate market, agents and/or home buyers and sellers. So they’ve spent a LOT of time understanding this tax, and they communicate it pretty well. In The 3.8% Tax Is not a Real Estate Transfer Tax, Robert Freedman, Senior Editor of Realtor Magazine, says this:
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.
Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.
The NAR has also prepared a brochure that looks at how the tax might apply under eight income scenarios: 1) sale of principal residence, 2) sale of a non-real estate asset, 3) gain, interest, and dividend from securities, 4) real estate investment income, 5) rental income as sole source of earnings, 6) sale of second home with no rental use, 7) sale of inherited investment property, and 8) purchase and sale of investment property.
This brochure does a nice job with simple math and explanations covering various scenarios the tax might apply to.
And if you want even more details, in relatively tax-code free speak, read the NAR’s FAQ on the “New Medicare tax on ”˜Unearned” net Investment Income” (as the “3.8% real estate tax is officially, and more accurately, called).
Hopefully this helps clear some of the confusion.
Probably not. But I swear if I see one more real estate “professional” claiming all home sales are going to be subject to a sales / transfer tax, I think my head will explode.
Even more accurate resources for information on the “3.8% real estate tax”
Top 10 Things You Need to Know About the 3.8% Tax (National Association of Realtors)
A 3.8 Percent “Sales Tax” on Your Home? (FactCheck.org)
A Sales Tax When You Sell Your Home? (MoneyTalksNews)
3.8% “Real Estate Sales Tax” thanks to Health Care Legislation? (Matt Stigliano RERockstar)
Photo Credit: David Reber’s Hammer Photography on Flickr. CC Licensed.
MHurtado for Movoto says
So . . . . .. for me, the real question is, what proportion of the ‘misinformation’ do you think we can attribute to Tea Partiers disgruntled with anything even remotely attached to the words “healthcare reform”? I’m guessing quite a bit.
Jay Thompson says
It’s all political. And the crap is flung from both sides of the aisle.
Denise Hamlin says
Wow Jay. Am I glad you wrote this post! I haven’t been asked about this yet, but when I am I will be prepared now.
Thanks for including the “even more resources on the 3.8% real estate tax.” I’m huge on research and will make sure I have read the lot before answering any questions!
Jay Thompson says
Thanks Denise! There’s some great info in those links. Some of it gets repetitive, but personally I find hearing it explained in different ways help it sink in better.
Rob McCance says
Given what it takes to be subject to this tax, I actually wish I had to pay it!
Jay Thompson says
Good point Rob…
Tj Harris via Facebook says
It would appear our educating the public on all things real estate is a never ending job. This issue just never seems to get cleared up. Hopefully you have enlightened the masses with this blog.
Jay Thompson says
A never ending job indeed. There’s something about real estate and taxes that seems to get goofed up more than most other stuff…
Pete Deininger says
Thanks for the very thorough post about this topic. My partners and I were discussing what this type of mis-information might mean if it gets to our clients who own here in Breckenridge. I think our biggest tool in this situation is “the truth” and your post goes a long way to shedding light on the situation. I’ll bookmark this and share with clients and my office.
PBC Resident says
The TRUTH is that many many baby boomers WILL end up paying 3.8%. Check that NAR link you provided. You would be surprised how many seniors on your west coast have gains on their real estate which would put them into this tax con. I hope you tell them as you take their listing and don’t surprise them come closing day….
Jay Thompson says
I don’t live on the west coast, and I have no idea how many people there, or here for that matter, would meet the criteria for paying this tax. I’m not privy to our sellers entire financial or tax status, and I’m not a tax expert.
We always advise our clients to seek professional assistance on potential tax implications, and will continue to do so.
I’m certainly not hiding the fact that the tax exists, and will impact some people. If I was, I wouldn’t have published this article.
Matt Stigliano says
Jay – First, thanks for the mention, as a fellow truth-seeker/researcher this one came to me early and that post has proven to be rather popular. You should see my Google Analytics for keywords relating to it – there are a lot of people looking for answers out there.
It’s a shame that what amounts to propaganda has become a way of life on the internet. By sending out misinformation, intentionally or not, we have created a system where he who speaks loudest gets credit as the most true and accurate source. Much like you mention in your post, I wouldn’t trust an email that looks like it was written by a circus clown. However, I think people do trust find trust and comfort in those emails. Perhaps because it’s not written like a press release? It’s the kind of colorization that someone’s aunt or cousin might use, so perhaps that’s the magic of it?
Regardless, you know I love your posts on these topics. Keep spreading the word!
Joaquin V. Tagarao says
Thanks Jay, we need more people like you. Education, education, education is what America needs right now. We are in a precarious times where misinformation is rampantly use that can affect the future of our country for someone/party’s benefits.
gary gidlow says
so, what is the truth? or will they make up the rules as they go along…like everything else lately. is it some of the people some of the time, or all the time….if it is part of the health care legislation…it is trouble for some of us
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