The 3.8% Real Estate Transfer Tax (AKA The Medicare tax) EXPOSED
It is time to break down all the questions regarding ‘The 3.8% Real Estate Transfer Tax’ that was so adeptly placed into the Obama Health Care Plan, which passed in the Congress in October 2012.
Set to begin taxing certain real estate transactions January 2013, the intent of this new legislation is to generate an estimated $210 Billion to help fund President Obama’s over haul of Health Care and Medicare.
This new tax will NOT affect all Real Estate transactions, but it may impose a tax on some interest, dividends and rents (less expenses) and capital gains (less capital losses). The tax is set to fall on individuals with Adjusted Gross Income (AGI) above $200,000 and couples with more than $250,000 AGI.
This new 3.8% tax applies to:
Individuals with adjusted gross income (AGI) above $200,000
Couples filing jointly with more than $250,000 AGI
Types of income affected:
Interest, dividends, rents (less expenses), capital gains (less capital losses)
Formula:
The new tax applies to the LESSER of
Investment income amount
Excess of Adjusted Gross Income (AGI) over the $200,000 or $250,000 income brackets
The Health Care Bill created a separate tax for high wage and self 
employment business income that in effect could cost the small business owner another 0.9% in taxes on earned income. Depending on how the small business has been set up (S Corporation, LLC or Sole Proprietor) it could be liable for the new unearned income tax of 3.8% or the earned income tax of 0.9%
Real Estate Affected by the 3.8% Tax
Sale of a principle residence: As long as the capital gain is less than $500,000, none would be taxable, unless other components of their AGI required it.
Sale of a second home with no rental use: (Renting the home for more than 14 days places the home in the investment property category, see below)
Investment property: Rental income (less expenses)could be taxed if the income from rents increases your AGI to the taxable bracket of $200,000 to $250,000
Second Home: If the home has never been rented or was rented for 14 days or less, that income is not taxable. Whatever gain is netted from the sale of the home is consider capital gains and is added to their AGI. Again if the AGI is over the $250,000 bracket all gains are taxed at the 3.8%
Sale of an inherited property: Capital gains from the sale of the property added to AGI could place that amount into the 3.8% tax bracket (other factors affect this example, such as depreciation recapture amounts)
This bill was never introduced, discussed or reviewed until just hours before this massive bill was on the floor for debate. It was enacted on March 23, 2010. This new tax was brought forward when it was unclear how the changes in Medicare under this new health care bill would be paid for. This new tax is expected to raise more than $210 Billion over a ten year period, representing more than half of the total new expenditures in the health care reform package.
The National Association of REALTORS® expressed its strongest possible objections, but the legislation passed on a largely party line vote. The final tally of votes in the Senate 219 to 212 with 43 Democrats joining all Republicans in opposition.
There is no way to soften this blow to the real estate market. Whether it be investors, home owners or those making their living in the real estate industry.
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