Health Care Bill and Real Estate Tax

I got a call on Thursday from a friend who had heard someone say that the new national health care bill, more specifically the Patient Protection Affordable Care Act (PPACA),  included a new real estate tax. The way it reportedly works, as he heard it, is that every real estate transaction would have a 3.8% sales tax. From what I’ve found, this is a misunderstanding of the tax, and most importantly, it appears to not be an ‘across the board’ tax on all transactions.

The portion of the bill which includes a tax, as it relates to real estate sales, applies only to the portion of the profit from a real estate transaction. Before a tax is calculated, the capital gains threshold must be met. Generally that’s a profit in excess of $250,000 for an individual, or $500,000 per couple. Then, if there’s profit from a sale beyond this threshold, the tax could apply. I believe from some of what I’ve read, that this would also only apply to sellers who have a certain income level.

It’s actually a bit more complicated than that, so I’m going to give some references to online comments I’ve found, and I’ll quote other online sources to give you what I’ve uncovered as best as I can.

Call, text, or email me today! … I’d seriously enjoy having the opportunity to talk to you about your plans if you’re moving, or if you know someone who is considering a move, and needs some straight answers.
The supposed Claim:   A provision of health care legislation imposes a 3.8% sales tax on all real estate transactions.

According to a site I looked at online which clarifies issues, including ‘urban legends’ this claim that home sellers will be paying a straight 3.8% sales tax, this isn’t correct.

Approximately what my friend heard, and what I’ve found online (apparently incorrectly) that has been spreading:

There will be a 3.8% tax on real estate transactions, and Under the new health care bill supposedly  all real estate transactions are subject to a 3.8% “Sales Tax”?

For example, If you sell a $400,000 home, there would be a $15,200 tax due.

Here’s some info I found online which seems to explain the issue further:

The PPACA creates a new Code Section 1411, which will generally impose a 3.8 percent tax on the lesser of “net investment income” or the excess of modified adjusted gross income over a “threshold amount” (generally, $250,000 for taxpayers filing a joint return, $125,000 for married taxpayers filing a separate return and $200,000 in all other cases). Net investment income generally means the excess of (i) interest, dividends, annuities, royalties, rents, income from passive activities, income from trading financial instruments and commodities, and gain from the disposition of certain non-business property, over (ii) allowable deductions properly allocable to such income. In determining the amount of net investment income, special rules apply with respect to dispositions of equity interests in certain partnerships and S corporations, and to distributions from certain qualified plans. This additional tax applies to taxable years beginning after December 31, 2012.

Most people who sell their homes will not be impacted by these new regulations. This is not a new tax on every seller, and that correction needs to be made. This tax is aimed at so-called “high earners” — if you do not fall into that category you will not pay any extra taxes upon the sale of your home.
As a simple example, if a couple with a combined income of over $250,000 per year decided to scale back by selling their large $2 million residence in favor of a smaller home, and they made a $750,000 profit on the sale, they would have to pay an additional 3.8% tax on $250,000 (i.e., the $750,000 profit minus the $500,000 capital gains threshold), for a total of $9,500.

Given that the median sales price of existing single-family homes in the U.S. was $170,700 in March 2010, and that about 1.5% of all households in the U.S. have incomes of $250,000 or above, the Medicare tax will likely affect only a small percentage of home sellers when it is implemented in 2013.

Here’s a quote worth reading that clarifies some of the issue:

In his recent guest column regarding the impact of the health care bill, Paul Guppy of the Washington Policy Center claimed that a 3.8 percent tax on all home sales was a part of the recently passed legislation. This is inaccurate and needs to be corrected. The truth about the bill is that if you sell your home for a profit above the capital gains threshold of $250,000 per individual or $500,000 per couple then you would be required to pay the additional 3.8 percent tax on any gain realized over this threshold.

Most people who sell their homes will not be impacted by these new regulations. This is not a new tax on every seller, and that correction needs to be made. This tax is aimed at so-called “high earners” – if you do not fall into that category you will not pay any extra taxes upon the sale of your home.

-Sara Orrange Government affairs director, Spokane Association of Realtors

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Zachary Epps, GRI, ABR, REALTOR®, full-time RE/MAX professional,  and author of the Boulder Real Estate and Neighborhood Guide.

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Comments

One Response to “Health Care Bill and Real Estate Tax”

  1. michael adams on September 25th, 2010 9:08 am

    Zachary,
    Thank you very much for this clear post. Minutes ago, on FoxNews this misinformation was spread, yet again.

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