Enough Already!!! - There Isn't a National Transfer Tax on Real Estate

I’ve had this question come up several times in the past few weeks from clients who are concerned that they will have to pay a transfer tax when they sell their home thanks to a provision in the Health Care Reform bill. It appears, bloggers are still trying to create some form of hysteria for homeowners suggesting they will now have to pay a national sales/transfer tax on their homes. I thought this was dispelled back in April/May when most national outlets (including the National Association of Realtors) ran stories indicating the articles and corresponding emails were false. However, it appears in the age of the internet, false or simply misleading information  can continue on for an indefinite amount of time in spite of numerous attempts to set the record straight.

Let’s summarize….the Health Care Reform Bill did in fact contain a funding provision that created a Medicare tax of 3.8% on the lesser of 1) net investment income for the tax year or 2) the excess (if any) of the modified adjusted gross income for the taxable year over the threshold amount (defined as $200,000 for an individual and $250,000 for married couples).

So, let’s break this down a bit further shall we? Net investment income is defined as interest, dividends, annuities, royalties, rents and capital gains (same as the current tax laws). There is no distinction between qualified and ordinary dividends or short-term and long-term capital gains. All are treated the same under the tax. For additional clarification, here are two scenarios to illustrate:

Scenario 1: Married couple with a modified adjusted income (earned and unearned) of $275,000 for the tax year. Earned income $265,000 and unearned income of $10,000. Although this couple is $25,000 over the threshold amount ($275,000 - $250,000), the 3.8% tax applies only to the unearned portion (see the lessor of provision above), thus $10,000 * 3.8% = $380.  That’s a back breaker for the family making over a quarter million dollars a year (for those doing the math that is just over $1/day - far less than the cost of a single tall latte at Starbucks.

Scenario 2: Married couple with a modified adjusted income (earned and unearned) of $200,000 for the tax year. Earned income $75,000 and unearned income of $125,000. Taxable amount = ($75,000 + $125,000 - $250,000) * 3.8% = $0 (yes, that’s right – no tax because they are below the threshold amount).

Now, let’s talk about home sales. The current capital gain exclusion amounts of $250,000 for single and $500,000 for a married couple have not been changed by the new law. The "lived in for two years within the past five years" component is also unchanged.  So let’s use another illustration:

Married couple with combined modified adjusted gross income of $225,000 ($200,000 earned and $25,000 unearned) who also sold a home they originally purchased for $250,000 and sold it for $725,000 (congratulations!!!). So, the capital gain on their home sale was $475,000 (without consideration to selling costs and other items which would actually reduce the capital gain amount). If you followed the examples above you realize this couple with $700,000 of income would not have any income subject to the 3.8% tax.

Now if you’re a real estate investor and receive net investment income (either through rents or capital gains) you may have a portion of your net investment income subject to the 3.8% tax but again only if your adjusted gross income exceeds the $200,000 or $250,000 threshold levels.

As in all cases involving taxes, seek professional advice from your tax consultant before making any decisions that may have tax implications.

Can we please put this one to bed now?!?!

 

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Craig Frazer, Realtor, CRS, GRI, CLHMS
RE/MAX Metro

Cell & Text: (801)699-6046
Email: cfrazer@remax.net

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