Home Sweet Home!
Thinking of deeding the family homestead to the next generation as a quick and easy way to beat the tax man, avoid probate or save the property from nursing home bills? Think again, and read more here.
Rumors are flying that the health care reform legislation includes a federal tax on all real estate sales. One partisan website bellowed: "Obamacare contains a little known tax, starting in 2013. Every American will now be taxed for the sale of any real estate. The rate will be 3.8%." Really? “Every American”? “Any real estate”?
Another helped with the arithmetic, predicting a $15,200 tax on the sale of a typical $400,000 home (3.8% x $400,000 = $15,200). Come now, did you think any federal tax could be calculated so easily? Read on.
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A 3.8% Federal "Sales Tax" on Real Estate? It is true that lawmakers included in the health care reform bill a new 3.8% tax on the net investment income of high-income persons. But characterizations of it as a "sales tax” on “the sale of any real estate” by “every American” are simply transparent attempts to scare up opposition to the new health care program.
The distortions emanate from both sides of the aisle: §1402 of the Health Care and Education Reconciliation Act of 2010 refers to it, not as a tax at all, but as an "Unearned Income Medicare Contribution."
If that does not make you feel any better, be assured that this new tax will have a minimal or no effect at all on most people. An individual with an adjusted gross income less than $200,000, or a married couple filing jointly with an adjusted gross income less than $250,000, will pay no tax regardless of how much unearned income they have. Period.
For many people, the biggest realization of unearned income is likely the sale of their home. But the exclusions for gains of $250,000 ($500,000 for married couples) on the qualified sale of a primary residence still apply. In the current real estate market, I do not know too many people around here who anticipate a $500,000 profit on their home.
Finally, the 3.8% tax is levied upon either (a) your profit (over and above the exclusion for the sale of a personal residence) or (b) the amount by which your adjusted gross income exceeds the threshold amounts, whichever is less. In essence this is a surtax (allocated, by the way, to the Medicare Trust Fund, which is part of the Social Security system) on either a capital gain on which you would be paying a 15% tax anyway but only to the extent that you are deemed "rich," i.e., the amount by which your adjusted gross income exceeds the applicable threshold.
Take whatever position you like on the health care reform package, but base it and your personal investment decisions on an accurate understanding of this and other applicable taxes. If you are buying, selling or refinancing real estate, I would be happy to be of help both planning and executing your transaction.