Updated July 2012
- There is a 3.8 percent tax in the healthcare reform bill; however much of the information circulating on the Internet is grossly inaccurate – the tax is not a transfer tax and it will not be imposed on all real estate transactions.
- The new tax will apply to high-income households and their “unearned” investment income, including capital gains, dividends, interest, and rents minus expenses.
- The tax could impact some real estate transactions; however it’s a complicated tax so we can’t predict how it will affect every buyer or seller.
- The new tax would apply only to households with adjusted gross incomes (AGI) above $200,000 for individuals or $250,000 for couples filing a joint return.
- The current capital gains tax law allows individuals to exclude up to $250,000 of profit from taxation, and $500,000 for married couples when selling a personal residence. The tax would only be imposed on the gain over the threshold amount.
- The 3.8 percent tax would apply to whichever amount is less an individual or married couple’s total investment income or the amount that their AGI exceeds the high-income threshold (of $200,000 for individuals or $250,000 for married couples).
- For example, a married couple has an AGI of $325,000. They purchased a home in California many years ago for $350,000 and sold it this year for $900,000, making a profit of $550,000. After excluding $500,000 from their gain of the sale, they are left with $50,000 investment income. Since their AGI is $75,000 over the married threshold amount the lesser amount of $50,000 would be subject to taxation – at 3.8 percent they would owe $1,900.
- Real estate investors are not affected at the time they acquire their investment. Their rental income could be subject to the tax, but only on NET rents (after expenses, including interest, taxes and depreciation).
- As long as the real estate investment is held, no capital gains are realized, so the tax can’t reach any capital gain during the period of ownership; only upon sale.
- The 3.8 percent tax will take effect beginning January 1, 2013.
- The legislation was enacted on March 23, 2010.
- The tax was not introduced, discussed or reviewed until hours before the final debate on the massive health care legislation began. NAR expressed its strongest possible objections, but the legislation passed on a largely party-line vote.
- Any revenue collected by the tax is dedicated to the Medicare hospital insurance fund, which is why the new tax is sometimes referred to as the “Medicare tax.”
- The legislation also included a 0.9 percent tax on the “earned” income (salary, wages, commissions) of high-income taxpayers – those with AGIs over $200,000 for individuals and $250,000 for married couples. The tax is only imposed on the income over the threshold amount.
- Examples and further analysis is presented in NAR’s brochure, The 3.8% Tax: Real Estate Scenarios & Examples.
- A video that explains the issue in further detail is posted online at http://speakingofrealestate.blogs.realtor.org/2010/11/24/the-3-8-tax-is-…