Buried deep in the 2,409 pages of the Obamacare bill is a little-known 3.8% tax on real estate and investments.
There’s a lot of misinformation circulating on the internet about this, so here’s my attempt to set the record straight on this complex topic.
- The tax is not a transfer tax and it will not be imposed on all real estate transactions.
- The new tax will apply to high-income households and their “unearned” investment income, including capital gains, dividends, interest, and rents minus expenses.
- The tax could impact some real estate transactions; however it’s a complicated tax so we can’t predict how it will affect every buyer or seller.
- The new tax would apply only to households with adjusted gross incomes (AGI) above $200,000 for individuals or $250,000 for couples filing a joint return.
- The current capital gains tax law allows individuals to exclude up to $250,000 of profit from taxation, and $500,000 for married couples when selling a personal residence.
- The tax would only be imposed on the gain over the threshold amount.
- The 3.8% tax will take effect beginning January 1, 2013.
- The 3.8% tax would apply to whichever amount is less an individual or married couple’s total investment income or the amount that their AGI exceeds the high-income threshold (of $200,000 for individuals or $250,000 for married couples). For example, a married couple has an AGI of $325,000. Assuming they purchased a home many years ago for $350,000 and sold it this year for $900,000, making a profit of $550,000. After excluding $500,000 from their gain of the sale, they are left with $50,000 investment income. Since their AGI is $75,000 over the married threshold amount the lesser amount of $50,000 would be subject to taxation – at 3.8% they would owe $1,900.
Clear as mud, right?
Obviously, I am not a tax professional, so please consult your CPA if you have questions.
Source: Idaho Association of Realtors®
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