The Truth about 3.8% Real Estate Tax

There are so many rumors going around about the 3.8% Real Estate Tax in the Health Care Bill that are very misleading. You may get an e-mail, see it on social media outlets or have someone tell you. It gives the distinct impression that every sale will be affected. Please save this as a response and send to others.

THIS ONLY APPLIES TO COUPLES WITH ADJUSTED GROSS INCOME OVER $250,000 AND IS CALCULATED ON THE LESSER OF THEIR "NET INVESTMENT INCOME" OR THEIR EXCESS EARNINGS OVER $200,000 INDIVIDUAL EARNINGS OR OVER $250,000 FOR COUPLES. The law doesn't go into effect until January 2013 and just about anything could change before that date.

 This is coming directly from the National Association of Realtors®:

NAR Frequently Asked Questions Health Insurance Reform National Association of REALTORS® Government Affairs Division 500 New Jersey Avenue, NW, Washington DC, 20001 REALTOR® is a registered collective membership mark which may be used only by real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS® and subscribe to its strict Code of Ethics

MEDICARE TAX ON NET INVESTMENT INCOME

Q. Is there a real estate "sales tax" or a transfer tax in the new health care bill?

 A. No, there is neither a real estate "sales tax" nor a transfer tax in the bill.

Q. What new taxes are there in the health care bill that will impact property owners?

 

A. There is a new 3.8% Medicare tax for "High Income Filers," defined as an individual who files a single return with Adjusted Gross Income (AGI) of more than $200,000 or a married couple with AGI of more than $250,000.

Q. When does the new 3.8% Medicare tax take effect?

 

A. The new Medicare tax will take effect January 1, 2013

Q. How is the new 3.8% Medicare tax calculated for high-income filers?

 

A. The new 3.8% Medicare tax is assessed only when the $200K/$250K AGI limits are exceeded. The net investment income that will be subject to tax is the LESSER of (1) net investment income OR(2) the excess of AGI over the $200K/$250K AGI limit.

Investment income includes: capital gains, rents, dividends, interest and business income earned by shareholders or partners not active in the business. Net investment income is investment income minus any allowable expense deductions.

Q. How will property owners be affected by this new tax?

A. Keeping in mind the income limitations above, real estate income that will be affected for high-income filers include:

o Sale of a primary residence: If the gain from the sale of the property is below $250,000 (individual)/$500,000 (couple) NO tax will have to be paid on the gain. The new Medicare tax would only apply to any gain realized over the $250K/$500K existing primary home exclusion that will bring the filers AGI over the $200K/$250K limits.

NAR Frequently Asked Questions Health Insurance Reform National Association of REALTORS® Government Affairs Division 500 New Jersey Avenue, NW, Washington DC, 20001 REALTOR® is a registered collective membership mark which may be used only by real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS® and subscribe to its strict Code of Ethics

o Second Home/Investment property: The additional 3.8% tax will apply to the portion of the gain realized on the sale of a second home or investment property that will bring the filers AGI over the $200K/$250K limit.

o Rental Income: The portion of net rental income that exceeds the $200K/$250K AGI limits will be subject to the new 3.8% tax

Q. Will "High Income Filers" also see a reduction in the amount of Mortgage Interest they are allowed to deduct?

A. No, there was not a cap on itemized deductions included in the final health care bill.

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DIANE CASALE, REALTOR, ABR, SNP

Huntsville, Alabama

 

© 2010 Diane Casale, all rights reserved