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Is there a new 3.8% "sales tax" on real estate in the Health Care Bill?

Reblogger
Real Estate Agent with Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate 303829;0225082372

THE NEW TAX ON REAL ESTATE TRANSACTIONS?  Not necessarily so.

Matt hss done us all a favor by breaking out how and where this tax is levied. 

No profit (gain), no tax.  If there is a gain, the tax will be charged to high income earners.  You know who you are. 

Of course, IMO, this tax is just piling on the consumer will be paying federal/state/local tax on that gain.  The money could be better spent in so many ways other than giving more financial power to the government.

Oh well.

Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.

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Original content by Matt Stigliano

An image of the first page of the health care bill.3.8% Real Estate Sales Tax - True or False?

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

All content ©2008-2010 by Matt Stigliano, Realtor® unless otherwise noted.

 Matt Stigliano, Realtor® | RE/MAX Access | (210) 646-HOME | www.RErockstar.com

"Your all access pass to San Antonio real estate."

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Comments (13)

Russell Lewis
Realty Austin, Austin Texas Real Estate - Austin, TX
Broker,CLHMS,GRI

I missed Matt's post and I do not know WHY someone has not mentioned this before now! One of my associates mentioned it last week but I still know little. Thanks for the re-blog as provides a crack in the door but this is another of those crazy things that get "tossed into the mix" when a gargantuan bill is cobbled together. My concern is that the "few" who are mentioned are the majority of my business. More will be revealed and I don't think it's going to be good!

Thanks for helping Matt shed some light on the subject!

Apr 27, 2010 10:07 AM
Andrea Swiedler
Berkshire Hathaway HomeServices New England Properties - New Milford, CT
Realtor, Southern Litchfield County CT

Lenn, thanks for the reblog, this is very good, clear information. It really won't hit many, yet I have heard flurries of mis-information about concerning this. Now I can tell them that they are not quite accurate!

Apr 27, 2010 10:09 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Russell.  Gargantuan is the word.  Further, I don't believe that many of us have a clue how insidious and pervasive this legislation is.

Andrea.  Not to worry.  If this one won't hit many, there are other tentacles that will.

Apr 27, 2010 10:17 AM
Matt Stigliano
Kimberly Howell Properties (210) 646-HOME - San Antonio, TX

Lenn - Thanks for the re-blog.  My big concern was the wording of some of the emails that turned something like this into nothing more than propaganda.  There's a difference between being against taxes and bills and using fear and mis-information to get people to believe one side or the other.  You can read some of the emails at: http://www.snopes.com/politics/taxes/realestate.asp

Russell - With you working the segment of the market you do, I suspect you'll see more people paying this than many others will.  It doesn't take effect until 2013.

Andrea - It was some of the emails I personally received (some from people who I would normally think would do their research a bit better), hearing people talking about it, and seeing it appear on Facebook and Twitter.  I have a strong dislike of mis-information.

Apr 27, 2010 10:26 AM
Lyn Sims
Schaumburg, IL
Real Estate Broker Retired

It sounds to me like they are taxing possible real estate profits if your income is over $250.  Calling it a 'high earner' for whom?  I don't consider $250K a year a high earner.  Personally I think $500 is.  It's a matter of perspective I guess.  We don't need any more new taxes on anything for any reason IMHO.

Apr 27, 2010 11:12 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Lyn.  They had to get the "high income" low enough to include a big chunck of the middle class for the numbers.  We have a lot of two income families in my area, professionals or high GS govt. employees that make 250K.

Lot of real estate agents do to.

 

Apr 27, 2010 11:30 AM
Leslie Ebersole
Swanepoel T3 Group - Saint Charles, IL
I help brokers build businesses they love.

Lenn, the bill is huge and perhaps insidious, but the email flurry has been ridiculous. My broker asked me to research this last week after a flurry of emails that essentially claimed that "Obama is going to tax all real estate sales". Perhaps to the displeasure our essentially conservative client base, I wrote an email for general use that stated that "to the best of our knowledge, there are no pending general taxes on real estate sales. Of course we advise you to consult a tax specialist" etc. etc.

I like Matt's disclaimer at the bottom. Very nicely worded.

Matt, thanks for a great post.

Lenn, thanks for the reblog.

Apr 27, 2010 01:00 PM
Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth

Lenn, thanks for clarifying this "tax" with the re-blog. Lots of confusion out there and rumors no less.

Apr 27, 2010 01:22 PM
Karen Fiddler, Broker/Owner
Karen Parsons-Fiddler, Broker 949-510-2395 - Mission Viejo, CA
Orange County & Lake Arrowhead, CA (949)510-2395

My opinion? Here a tax, there a tax, everywhere a tax, tax. Enough said.

Apr 27, 2010 02:29 PM
Kent Anderson
Coldwell Banker Resort Realty, Sandpoint, Idaho - Sandpoint, ID
from Schweitzer to the Lake

Thanks for the clarification Lenn & Matt.  Hopefully this new tax won't morph into yet another form.  Nothing seems real anymore.

Apr 27, 2010 03:27 PM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Lenn,

Thanks for reblogging this.  A rose by any other name...

Mike in Tucson

Apr 28, 2010 12:55 AM
Paul S. Henderson, REALTOR®, CRS
Fathom Realty Washington LLC - Tacoma, WA
South Puget Sound Washington Agent/Broker!

It is so hard to keep up with all the new taxes on the middle class. Trickle down taxes?
Have a great Wednesday Lenn,
Paul

Apr 28, 2010 01:37 AM
Tammy Lankford,
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Broker GA Lake Sinclair/Eatonton/Milledgeville

I see this tax hitting some of my clients as well.  Some of my investors that have bought lake REOs for between $500,000 and $1,000,000. will be turning those kind of profits.  And 2013 is really just around the corner.

Glad you reblogged this.  I'd missed it.

Apr 28, 2010 01:02 PM