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Did You Hear About the 3.8 Percent Tax on Real Estate?

Have you heard that part of the health care reform included a 3.8 percent tax on the sale of your home? Yes there is a 3.8 percent tax, but read further to get the whole story.

Did you hear about the 3.8 percent tax on real estate that goes into effect in 2013?

Ever since health care reform was enacted into law more than two years ago, rumors have been circulating on the Internet and in e-mails that the law contains a 3.8 percent tax on real estate. Although there was a 3.8 percent tax that was added into the health care law at the last minute and never considered in hearings, it’s a tax that will only affect high-income households that realize a substantial gain on an asset sale, including on a home sale, once other factors are taken into account. Maybe 2-3 percent of home sellers will be affected.

Here are the criteria:

1) Any home sale gain (principal residence) must be more than the $250,000-$500,000 capital gains exclusion that’s in effect today. That’s gain, not sales amount, so you really have to reap a substantial amount for the tax to even come into play. Obviously, not many people are seeing that sort of gain when they sell their home in today's market.

2) If you do happen to see a gain of more than the $250,000-$500,000 exclusion (that’s $250,000 for single filers and $500,000 for joint filers), only the amount above the exclusion would be factored into the tax calculation, and that would still only apply to high-income households, which the law defines as single people earning $200,000 a year and joint filers earning $250,000 a year.

So, if you are a households with annual income of $250,000 or more and you earn a gain of more than $500,000 on your house (again, that’s after the $500,000 exclusion), any amount of gain above the exclusion would be plugged into a formula to see if it’s taxable. If it turns out that it’s taxable, then the amount could be subject to the 3.8 percent tax. If the household had a gain of more than $500,000 but only earned $249,000 a year in income, the tax wouldn’t apply.

Hope that helps dispel the rumors!

If you have any questions, please let me know in the comments below.

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.

Hal Schneider October 18, 2012 at 04:45 PM
Tim, I think the exclusion only applies to one's "primary residence", doesn't it? If you have a second home, or a rental property, how would this affect someone?
Tim Hopkins October 18, 2012 at 07:58 PM
Good question Hal. For a rental or vacation home the tax would still only apply to "High Income" taxpayers. This is defined as those filing “single” with Adjusted Gross Income (AGI) of more than $200,000 or married couples filing a joint return with AGI of more than $250,000. (The AGI threshold for married filing separate returns is $125,000.) For those qualifying under this criteria, the taxpayer will determine the LESSER of (1) net investment income OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment income is the smaller amount, then the 3.8% tax is applied only to the net investment income amount. If the excess over the thresholds is the smaller amount, then the 3.8% tax would apply only to the excess amount. Hope that helps.

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