Recent Changes to Capital Gains Tax upon The Sale Of Real Estate

Recent Changes to Capital Gains Tax upon the Sale of Real Estate

Effective:  January 1, 2013 Supplemental Health Care Reform Tax upon the Capital Gain sale of Certain Real Property.

There has been a great deal of misunderstanding that the new Health Care Reform Bill imposes a 3.8% sales tax on the sale of each property.

First, there is no “sales” tax on the sale of real property.  However, the new law does impose a supplement capital gains tax on certain property sales made by certain sellers.  The new law contains a 3.8% tax on “unearned income” (capital gains) for certain level income individuals.

To be subject to the new 3.8% capital gains tax, you must earn $200,000.00 if you are single or a married couple making more than $250,000.00.  The capital gain on the home sale must exceed $250,000.00 if this is a primary home and you are single or $500,000.00 if you are married.  For example, if you and your spouse make $300,000.00 annually and you bought a home that you lived in for more than two years for $600,000.00 that now sells for $1 million, the capital gains tax on that home sale would be zero. However, if the home sold for $1.2 million, thereby resulting in a capital gain of $600,000.00, the first $100,000.00 of that capital gain would subject to the new tax (after the $500,000.00 exemption).

However, in many instances, Florida is not the principle residence for many individuals who earn above these income thresholds ($200,000/$250,000) resulting in capital gain on the sale of second homes, investment properties or properties that do not qualify for principal residence treatment (i.e. lived in less than two years). As a result, the full capital gain would be subject to the new 3.8 percent tax.

Effective:  January 1, 2013 Increase in the Base Capital Gains Rate for High Income Individuals and Couples.

The base capital gain rate for primary residences held less than two years or where the gain of from the sale is in excess of $250,000.00 for individuals or $500,000.00 for couples the new rate has increased from 15% to 20% for high income earners.  Additionally, the sale of any non-primary residence (second homes or investment properties) where any gain (profit) is realized will now be taxed at 20%.  For purposes of this new tax rate high income earners are defined as individuals earning $400,000.00 or more or couples earning $450,000.00 or more.  The net result is that 1031 Tax Deferred Exchanges may become more attractive to many high income sellers than they have been in recent years.

Bottom Line

If you earn less than $200,000.00 individually or $250,000.00 as a couple, capital gain will remain at 15%. If you earn above $200,000.00/$250,000.00 respectively the effective capital gain rate will now be 18.8% as you will be subject to a supplement 3.8% Health Care Reform Tax. If you are a high income earner who earns above $400,000.00 individually or $450,000.00 as a couple you will be subject to both the supplemental 3.8% Health Care Reform Tax as well as the increased 20% Capital Gain Tax for an effective rate of 23.8%

Additionally, dependent upon the state you live in, you may also be subject to a State Income Capital Gain Tax.

Another Important Change

The Mortgage Forgiveness Relief Act of 2007 which was set to expire December 31, 2012 was extended for one additional year.  Under this Act, debt forgiveness of up to $1,000,000.00 for individuals and $2,000,000.00 per couple will not be subject to tax, provided this debt relieved was on the taxpayers primary residence.  This will continue to assist short sale borrowers with the sale of their home.

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