You may have received an email or heard something on Twitter about the 3.8% real estate sales tax that has recently been brought up as an issue with the Health Care Bill (HR 3200). In the emails, the tax is railed against and brought up as an absolute for all Americans selling their homes.
But wait...maybe we should dig further. Is it true? Is it kind of true? Is it blatantly false? Does it lie somewhere in between? Seems this is just another case of email first, tell the truth later.
There is indeed a 3.8% tax in the Health Care Bill. It, however, is incorrectly labeled as a sales tax. It is called a Medicare tax in the legislation and I know we're splitting hairs here, but I think it's important to mention as the use of specific words like this are calculated and planned by people to manipulate people's emotions.
This tax however, does not single out real estate, rather it is a tax on investment income. The key to everything is how the numbers are calculated on whether or not the tax applies to you. The 3.8% Medicare tax is designed to only affect so-called "high earners" and not everyone will pay the tax upon the sale of their home.
The Tax Facts
- There is a new 3.8% tax in the bill.
- It is not a "sales tax" on all real estate transactions.
- It is a Medicare tax.
- Many people will not have to pay this tax.
- It is going to affect so-called "high earners."
- It is not going affect many people.
- The tax comes into effect in 2013.
"High Earners" - Who are they?
The income requirement for so-called "high earners" are spelled out in the new law: $250,000 for married couples filed jointly, $125,000 for couples filing separately, and $200,000 for all others. If you earn more than these benchmarks, you are a "high earner" and therefor subject to the new 3.8% tax, but what you are taxed on helps further eliminate many people.
How is the tax calculated?
One of the emails I've seen states that on the sale of a $400,000 home, you would pay $15,200 as a real estate sales tax (3.8% x $400,000). This is incorrect. There are two incorrect assumptions by the authors of the email; a) that the Medicare tax is based off of sales price alone and b) it applies to everyone (which we know to be false based on the "high earner" income requirement).
The incorrect assumption that the real estate sales tax (aka the Medicare tax) is calculated based on the sales price of the home makes a huge difference. Instead, the tax is calculated based on profit. As investment income, the profit is the sale price minus the initial investment. Going back to the $400,000 home mentioned earlier, let's assume you paid $350,000 for it. You profited $50,000. Based on that, your tax would be $1,900 (3.8% x $50,000). Much better than $15,200, right?
But wait, there's one more piece of the puzzle.
Okay, so you owe $1,900, which isn't that bad in the overall scheme of things. But wait...do you owe $1,900? The answer is a resounding no. Why? Because of the capital gains threshold that is included in the language. You are only charged the 3.8% Medicare tax if your investment income passes the capital gains threshold. How much is that? The capital gains threshold is $250,000 for individuals and $500,000 for married couples filing jointly.
This means that profit over the $500,000 or $250,000 (depending on your marital status) would be taxed at the 3.8% rate (you would still need to be classified a "high earner"). In our $400,000 example above, where you walked away with $50,000 in profit, you would not be taxed. The $50,000 is below the capital gains threshold.
Want to see more examples with calculations? Visit "3.8% “Real Estate Sales Tax” thanks to Health Care Legislation?"
Although this topic has political implications, the intent of the post is not to debate opinions about the health care bill, taxes, or politics in general. No matter what you believe politically, the post is designed to inform - not to debate, attack, or throw mud at those that don't agree with you. I ask that all visitors respect that on my blog. There are plenty of political forums where that is acceptable and I encourage you to visit them if you wish to discuss such matters. Thanks in advance - Matt
photo courtesy of Listener42