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Real Estate Sales Tax? Not Exactly

by | Oct 7, 2010


The rumors have been spreading lately, through email mostly, about a new real estate sales tax attached to the Health Care Reform Bill. They usually say something like “UNDER THE NEW HEALTH CARE BILL – DID YOU KNOW THAT ALL REAL ESTATE TRANSACTIONS ARE SUBJECT TO A 3.8% SALES TAX?”. While this may scare individuals who may be looking sell real estate the truth is most probably have no reason to worry.

A new tax does exist, however it applies to only a fraction of sellers and it isn’t a “sales” tax. For example, if your adjusted gross income is less than $200,000 a year (or less than $250,000 if filing jointly) then you are exempt, this bill does not apply to you. I’m sure that makes many would be sellers happy, but what about everyone else? There’s some good news for them as well.

For those earning over $200,000 a year this tax still does not apply to the first $250,000 ($500,000 if married) of profits received from the sale of your home. Who has to worry about this? Here are some examples taken from FactCheck.org:

— A single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His tax on the sale of that vacation home would amount to $1,900, in addition to the capital gains tax he would have paid anyway.
— An “empty nester” couple with combined income of over $250,000 a year who sell their $1 million primary residence to move to smaller quarters. If they cleared $600,000 on the sale, they would be taxed on $100,000 of the profit (the amount over the half-million-dollar exclusion). Their health care tax on the sale would amount to $3,800 over and above the usual capital gains levy.

FactCheck.org also restores hope to those still worried about facing this tax:

However, a typical home sale would not incur any tax. In March, for example, half of all existing homes sold for $170,700 or less, according to the National Association of Realtors. Obviously, none of those sales could possibly generate a $250,000 profit, and so none would be subject to the tax. Thus, for the vast majority, the 3.8 percent tax won’t apply. The Tax Foundation, in a report released April 15, said the new tax on investment income (including real estate) “will hit approximately the top-earning two percent of families” when it takes effect in 2013.

While there is a tax for very few, it isn’t a sales tax and will hardly affect the real estate market. It certainly isn’t as bad as it is made out to be in the rapidly spreading emails.  This tax is a Medicare tax, allocated to the Medicare Trust Fund, which is a part of the Social Security System. The Medicare tax applies to individuals with an adjusted gross income over $200,000 a year who sell a principal residence or second home for a profit of over $250,000, and the tax is computed only on the sale amount over $250,000 (the first $250,000 is exempt.)

This posting is an editorial and is not intended as legal or tax advice. Please contact your tax professional for proper guidance.

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