On January 1, 2013, a new 3.8 percent federal tax will take effect. The tax will benefit the Medicare program and was part of the healthcare legislation that was passed in 2010 (Obamacare). The 3.8 tax applies only to income on certain investments earned by high income individuals and couples.
The urban myth about this tax is that it is a new tax on real estate sales. While there are certain scenarios where a gain on a real estate transaction may be taxed, the tax does not apply to the real estate transaction itself.
The new tax applies only to individuals with $200,000 in adjusted gross income and couples with $250,000 in adjusted gross income. In addition, the exclusion for capital gains on real estate still applies.
An email has been circulating in real estate circles that contains inaccurate claims about a new 3.8 percent tax on capital gains income that begins in 2013. The new tax, which is an add on to existing capital gains taxes (scheduled to increase from 15 to 20 percent next year), was enacted as part of the health reform legislation.
However, the email is wrong in that it implies that the 3.8 percent tax is a sales tax or transfer fee-type tax. The 3.8 percent tax is assessed only against certain capital gains income, and it only applies to taxpayers reporting more than $250,000 in income ($200,000 if single).
More importantly for housing, the existing $500,000 / $250,000 gain exclusion for a seller of a principal residence continues to apply, so most principal residences sales by homeowners will not be affected. Some sellers of second homes, with high incomes, may have to pay some additional capital gains tax. However, most of the new tax will fall on the sale of stocks, bonds and financial instruments, which have no gain exclusion rule.
Consider the following, typical example. Suppose a married homeowner sells their principal residence for $500,000, after having purchased the home some years ago for $200,000. The capital gain on the sale is about $300,000. The homeowner is allowed (under Section 121 of the Internal Revenue Code) to exclude from all tax (including the standard capital gains tax and the new 3.8 percent tax) up to $500,000, so there is no tax on the realized $300,000 gain on the home sale.
The 3.8 percent tax is not in any way a sales tax paid on the sales price of the home, for either the home seller or home buyer. NAHB has written about this issue in an April edition of Nation’s Building News. Click here to read that article.