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New 3.8% Real Estate Sales Tax: Truth or Myth?

Find out if the much feared and discussed tax taking effect Jan. 1 is true!

Rumor has been flying that beginning Jan. 1, 2013, a new 3.8 percent sales tax will be imposed on real estate sales transactions.

Contrary to popular belief, this new tax will only affect some real estate transactions to owners whose income meet a certain threshold, but not all of them.

Passed by Congress in 2010, the intent of this tax is to generate an estimated $210 billion to help fund President Barack Obama’s health care and Medicare overhaul plans.

Per National Association of Realtor’s president, LeFrancis Arnold; “the new law imposes a 3.8 percent tax for households in the top tax brackets on “unearned income.”  This includes capital gains.  However, this will not impact the exclusion on capital gains earned from the sale of a primary residence up to $250,000 for individuals and up to $500,000 for married couples. The 3.8 percent tax only applies to capital gains ABOVE the normal ($250,000 or $500,000 respective) exclusion.  A typical home sale will not incur any tax, and for the vast majority, the 3.8 percent tax won’t apply.”

The 3.8 percent tax will only:

  • Apply to Individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI.  
  • Against some (but not all) unearned income from interest, dividends, rents (less expenses) and capital gains (less capital losses).  If your income is solely “earned” - salary and other compensation derived from active participation in a business — you have nothing to lose from the new tax.  
  • Calculated as the LESSER of

1)    Investment income amount or
2)    Excess of AGI over the $200,000 or $250,000 amount

By NAR’s estimation, the 3.8 percent tax should affect, “statistically at this point, 2 to 3 percent of the entire population.”

Click to see The 3.8 percent Tax Real Estate Scenarios and Examples.

Note:

1)    Make sure to document the expenses of capital improvements made to the property, including settlement or closing costs. These expenses increase the tax basis; which, in turn, lower the capital gain of your house. 

2)    Investors/homeowners with (large capital gains) should seek guidance of a tax professional concerning this issue.  The amount of tax will vary from individual to individual because the elements that comprise Adjusted Gross Income differ from taxpayer to taxpayer.

3)    NAR has prepared Top Ten Things You Need to Know about the 3.8 percent Tax and a video explaining how the tax works.

4)    See NAR site Frequently Asked Question on the 3.8 percent tax.  

(*) Disclaimer - The article is intended to provide general information on the subject. Readers who require specific advice should consult experts in the area of interest.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Anne November 17, 2012 at 06:09 PM
Tax the rich! When does it stop? Are people employed by low income earners?
Sylvia Barry November 17, 2012 at 06:41 PM
Look at the bright side, Anne! At least the ones that are taxed for this are well of (I understand that's in the eyes of the beholders) and made more than the normal exclusion on the real estate transaction :-) For others that don't fit the criteria, there is no urgency of selling before 12/31 just to avoid the 3.8% sales tax.
Sylvia Barry November 19, 2012 at 04:47 PM
Examples in this NAR article help with understanding how this new law can be applied to gains on real estate sales. http://www.ksefocus.com/billdatabase/clientfiles/172/8/1437.pdf

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