You may have already heard through an errant email or co-worker that hidden in the health care bill was a provision for adding a 3.8% sales tax on the sale of your home.
Weâ€™ve even been forwarded emails with the story contained in a newspaper article. So is there any truth to it? Well, sort of.
The much ballyhooed 3.8% tax in the health care bill which takes effect in 2013 is actually a Medicare tax on investment incomeâ€”not a real estate tax per se. That alone might not make you feel any better but read on.
According to factcheck.org , which did extensive research, there are very limited circumstances in which this tax would be levied.
As it would apply to real estate, first your income would need to be over $200,000 a year ($250,000 for married couples filing jointly).
Now if youâ€™re selling your principle residence, the first $250,000 of gain for single tax filers and $500,000 for those who file jointly would be exempt from taxationâ€”as it currently stands for capital gain taxation.
The 3.8% tax would, as we understand it, apply only to the portion which might exceed this threshold. Itâ€™s also important to note that this tax is on the gain, not the sale price. So if you were to sell a home you and your spouse bought for $500,000 several years later (you need to have lived in the home two of the past five years) for $800,000, you would have a gain of $300,000. This is of course is further diminished by any capital improvements you made to the property and selling costs but to keep it simple weâ€™ll use the higher figure of $300,000. Based on this you would still owe no capital gain tax nor would you owe the new Medicare Tax even if your income was over the $250,000 threshold because your gain was only $300,000â€”less than the allowable first $500,000 which is forgiven.
So several things need to happen before you would be subject to the tax:
- Your income must exceed the thresholds mentioned above.
- Your gain on the sale of your home must exceed the allowable forgiven limits.
Note that this capital gain exclusion is for your principle residence only so high wage earners who sell their investment properties would be subject to this new tax on that gainâ€”assuming they had gain to tax.
As far as we can tell the viral nature of this email succeeded in part because it resonates with what many readers feared about the health care billâ€”that it would be caulk full of special interest groupsâ€™ and hidden agendas. Further exacerbating this was that many email authors added their own spin by including miscalculated and outrageous examples of how the tax would be applied. Their agenda was then further picked up by those who wish to freighted people into voting the way they would want by saying, as the email I received said, â€œPeople have the right to know the truth because an election is coming in November!â€
I couldnâ€™t agree more and we hope this explanation is closer to that truth.
Now for the inevitable disclaimer: The information contained in this newsletter is educational and intended for informational purposes only. It does not constitute real estate, tax or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.