3.8% Tax on Real Estate: National News

Real Estate Sales Representative with Coldwell Banker-Buffalo Grove-Long Grove-Vernon Hills-Deer Park-Barrington-Mundelein

There is a 3.8% tax in the healthcare reform bill; however much of the information circulating on the Internet is grossly inaccurate – the tax is not a transfer tax, and it will not be imposed on all real estate transactions. The 3.8% tax will take effect beginning January 1, 2013.

The new tax will apply to high-income households and their “unearned” investment income, including capital gains, dividends, interest, and rents minus expenses. The tax could impact some real estate transactions, but with this tax being so complicated we cannot predict how it may or may not impact every buyer or seller. The new tax would apply only to households with adjusted gross incomes (AGI) above $200,000 for individuals, or $250,000 for couples filing a joint return.

The current capital gains tax law allows individuals to exclude up to $250,000 of profit from taxation, and $500,000 for married couples when selling a personal residence. The tax would only be imposed on the gain over the threshold amount. The 3.8% tax would apply to whichever amount is less an individual or married couple’s total investment income or the amount that their AGI exceeds the high-income threshold ($200,000 for individuals or $250,000 for married couples).

Are the net proceeds, on the sale of your personal residence going to exceed $250,000 of profit, as an individual or $500,000 as a married couple? Does your adjusted gross income exceed the high-income threshold of $200,000 if an individual, or $250,000 for a married couple? If yes to both, please seek advice from your Certified Public Accountant.


John and Mary sold their principal residence and realized a gain of $525,000. They have $325,000 Adjusted Gross Income (before adding taxable gain).

The tax applies as follows:

AGI Before Taxable Gain $325,000
Gain on Sale of Residence $525,000
Taxable Gain (added to AGI) $25,000 ($525,000 - $500,000)
New AGI $350,000 ($325,000 + $25,000 taxable gain)
Excess of AGI over $250,000 $100,000 ($350,000 - $250,000)
Lesser Amount(Taxable) $25,000 (Taxable gain)
Tax Due: $950 ($25,000 x 0.038)

If John and Mary had a gain of less than $500,000 on the sale if their residence, none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax would depend on the other components of their $325,000 AGI.

The Bridgers own a vacation home that they purchased for $275,000. They have never rented it to others. They sell it for $335,000. In the year of sale they also have earned income from other sources of $225,000.

The tax applies as follows:

Gain on Sale of Vacation Home $60,000 ($335,000 - $275,000)
Income from other sources $225,000
New AGI $285,000 ($60,000 + $225,000)
Excess of AGI over $250,000 $35,000 ($285,000 - $250,000)
Capital Gain $60,000
Lesser Amount (Taxable) $35,000 (AGI Excess)
Tax Due $1,330 ($35,000 x 0.038)

Note: If the Bridgers rent the home for 14 or fewer days in the course of the year, the rental income is non-taxable and the results in the year of sale will be the same as shown above.

It is best to refer to your Certified Public Accountant for any tax advice, however if you are looking to buy or sell real estate in Northern Illinois, please contact The Sharron Kelley Team today!


Courtesy of Coldwell Banker

Comments (7)

Christine Adler
FindAHomeWithMe.com - Fort Lauderdale, FL
SE Palm Beach, Broward & NE Miami-Dade Counties FL

Great information, and timely!  Thanks for the clarification of the sometimes murky tax guidelines!

Dec 28, 2012 01:07 AM
Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

Sharron, this one is so complicated that it's going to take a really smart CPA to figure it out.  And it is going to give a lot of people who've been in their homes for a very long time a strong disincentive to sell, especially if they have a large gain and are not married.  

Dec 28, 2012 01:38 AM
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Sharron:  Well done!  And I like that you include the instructions regarding seeking counsel from a Certified Public Accountant, if in doubt as to how this will impact your reader's transactions and finances.  Always a wise suggestion.  There is so much buzz about this right now ... you explanation and examples are delivered at a good time.  Thank you ...


PS:  Happy New Year!


Dec 28, 2012 02:20 AM
Debbie Reynolds, C21 Platinum Properties
Platinum Properties- (931)771-9070 - Clarksville, TN
The Dedicated Clarksville TN Realtor-(931)320-6730
Sharron, This tax makes me angry and is just one more way to triple tax the people that work hard and prosper.
Dec 28, 2012 04:17 AM
Lottie Kendall
Compass - San Francisco, CA
Helping make your real estate dreams a reality

There's so much mis-information floating around about this tax, which people erroneously call a 'tax on real estate.' It's a tax on capital gains.  I'm glad you posted some clear examples, and advised people to consult with an accountant.

Dec 29, 2012 11:50 PM
Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

Hey Sharron, I included this post in Last Week's Favorites.  And Happy New Year to you and all of your favorite people.

Dec 30, 2012 04:27 AM
Steven Cook
No Longer Processing Mortgages. - Tacoma, WA

Sharron -- thank you for this great post on how this 3.8% tax really works.   I was referred over by Patricia's Favorites list.     Suggested and re-blogging.

May you and yours enjoy a safe new year's celebration!

Dec 31, 2012 08:56 AM