The Berra's Lake of the Ozarks Real Estate Blog

3.8% Tax on Real Estate Sales???

March 9th, 2011 2:05 PM by Mike and Susie Berra

 Lawmakers have decided on a new 3.8 percent tax on the net investment income of high-income persons for a Medicare tax hike per the new health care law. The Medicare tax hike would for the first time incorporating filing status into each person's Medicare tax liability, and also for the first time, the Medicare tax will not apply just to wages but also to investment income such as income from capital gains, dividends, interest and rental property.

Those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it. The tax 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.

And it does say the tax falls on "net gain … attributable to the disposition of property." That would include the sale of a home. 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. 

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 does not apply to vacation homes or rental properties.

William Ahern, director of policy and communications for the nonprofit, pro-business Tax Foundation said that "Some home sales would see a tax increase under this bill 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)."

So there you have it. The sort of people who would have to pay the tax might include, for example:

  • A single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His tax on the sale of that vacation home would amount to $1,900, in addition to the capital gains tax he would have paid anyway.
  • An "empty nester" couple with combined income of over $250,000 a year who sell their $1 million primary residence to move to smaller quarters. If they cleared $600,000 on the sale, they would be taxed on $100,000 of the profit (the amount over the half-million-dollar exclusion). Their health care tax on the sale would amount to $3,800 over and above the usual capital gains levy.

Thus, for the vast majority, the 3.8 percent tax won’t apply. The Tax Foundation said the new tax on investment income (including real estate) "will hit approximately the top-earning two percent of families" when it takes effect in 2013.

The Internal Revenue Service says that to qualify for the $250,000/$500,000 exclusion, a seller must have owned the home and lived there as the seller’s "main home" for at least two years out of the five years prior to the sale.

Sources... and 

Posted in:General
Posted by Mike and Susie Berra on March 9th, 2011 2:05 PM



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