At least twice per month, I get a question from an Associate regarding the supposed Obamacare 3.8% sales tax on housing. The Associate has usually been sent an email from a friend that reads something like:
Under the new health care bill – did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don’t kick in until 2013 If you sell your $400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Does this stuff make your November and 2012 vote more important?
Oh, you weren’t aware this was in the Obama-care bill? Guess what, you aren’t alone. There are more than a few members of Congress that aren’t aware of it either.
Now, the email as written above, is completely false. Here’s the way the tax will actually work:
The health bill included a provision that imposes a new 3.8 percent Medicare tax for some high-income households that have “net investment income.” Any revenue collected by the tax is dedicated to the Medicare hospital insurance program. This new tax applies only to households with Adjusted Gross Income (AGI) of more than $200,000 for individuals or more than $250,000 for married couples. Since capital gains are included in the definition of net investment income, an additional tax obligation might result from the sale of real property. Even if the AGI limits are met, the new tax would not be applied to capital gains that result from the sale of a home, since the existing home sale capital gains exclusion rule still applies – $250,000 (individual)/$500,000 (couple). So if the gain from the sale of the primary residence is below that amount, then NO Medicare tax will have to be paid on the gain. The new Medicare tax would apply only to a home sale gain realized in excess of the $250K/$500K that pushes the filer’s AGI over the $200K/$250K income limits.
So, a retiring couple who bought their home in 1980 for $200,000, earned $220,000 in 2012, and sold that home in 2012 for $700,000 would not pay the additional tax described above. In fact, the overwhelming majority of home sellers would not pay the additional tax.
As always, your sellers need to consult their tax advisers with questions regarding, well, taxes. Here is some more information, via the links, that explain this issue further: