Is the New Health Care Bill Really Affecting Real Estate Taxes in 2013?

Home Sales Tax Affects Few Home Sellers

When the U.S. Supreme Court upheld the health care reform law on federal tax grounds, it re-activated a housing issue that had been relatively quiet for the past year: the 3.8% “real estate tax” on home sales beginning in 2013 that is buried in the legislation. Email warnings then had come out like wildfire asking everyone if they knew that they would have to pay 3.8% in taxes if they sold their house after 2012. Once litigation challenging the law’s constitutionality surfaced in federal courts, the email warnings subsided.

With the law scheduled to take effect less than six months from now, questions are being raised again:   is there REALLY a 3.8% transfer tax on real estate coming in 2013? Does it pre-empt the existing $250,000 and $500,000 capital gains exclusions for single-filing and joint-filing home sellers?

To clear up all the asking questions and emails, yes there is a 3.8% surtax that will take effect January 1, 2013 on certain investment income of upper-income individuals, including some of their real estate transactions. But it’s not a transfer tax and not likely to affect the vast majority of homeowners who sell their primary residences next year.

In fact, unless you have adjusted gross income of $200,000 as a single-filing taxpayer, or $250,000 for couples filing jointly, you will probably not be touched by the surtax at all. And even if you do have income greater than these thresholds, you still may not be hit with the 3.8% tax unless you have certain types of investment income targeted by the law, specifically dividends, interest, net capital gains and net rental income. If your income is “solely earned” you have nothing to worry about from the new surtax. 

Where things can get a little complicated, is when you sell your home for a substantial profit, and your adjusted gross income for the year exceeds the $200-250,000 thresholds. But the good news to that is that the 3.8% surtax does not interfere with the current tax-free exclusion on the first $500,000 (joint filers) or $250,000 (single filers) of gain you make on the sale of your principle home. Those exclusions have not changed. 

In conclusion, the 3.8% levy can be a little confusing, doesn’t affect the people as the email warnings want you to believe….. yes, it can bite deeper when your taxable capital gains are far larger or you sell your real estate, where all the profits could subject you to the investment surtax. Definitely talk to a tax professional for advice on your specific situation. 

Dee Marie Fisher

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