3.8% “Real Estate Sales Tax” thanks to Health Care Legislation?
A new tax on real estate?
Recently, the emails have been flying, I’ve seen a few mention on places like Twitter and Facebook, and I’ve even heard a few Realtors® up in arms and misquoting the provisions for a 3.8% “real estate sales tax” in the Health Care Reform Bill. While real estate might seem a bit odd stuck in the middle of health care legislation, things like this have a way of working their way into bills with other intentions. In today’s political whirlwind of health care reform, it’s no wonder that this has become a hot topic as of late.
As usual, although this post has political implications, I ask everyone to check their political leanings at the door. This is not a debate over whether health care is right or wrong or whether something about real estate should be stuck in a bill of this nature. There are plenty of sites to debate the pros and cons of our country’s politicians and I urge you to get involved in whatever way you’d like, but I don’t want this post to descend into some of the nasty arguments (on both sides) I have seen elsewhere.
The Facts.
- There is a new 3.8% tax in the bill.
- It is not a “sales tax” on all real estate transactions.
- It is a Medicare tax.
- Many people will not have to pay this tax.
The new Medicare tax on real estate sales is actually a tax on investment income for so-called “high earners.” The income requirements are clearly spelled out in order to define “high earners” – $250,000 for married couple filing jointly, $125,000 for couples filing separate returns, and $200,000 for everyone else. If your income is above these levels, you will be paying a new tax on investment income. If it falls below that, you will not be taxed.
With that in mind, a 3.8% Medicare tax on the sales of a $400,000 home would be $15,200, which is a lot of money to pay in tax. This is where many people’s calculations have gone astray however, as the real estate “sales tax” is not on the entire amount of the sale. Instead it is on the amount of income that exceeds the capital gains threshold ($500,000 for married couples filing jointly, $250,000 for single filers).
Real world examples.
Example #1: Meet Bob and Susie, a couple who make $300,000 in income a year. They have a beautiful home that they sell for $2 million, this nets them $750,000 in profit (sale price of the home – commissions and fees – price they paid for the home = profit from the sale of the home). Because they are defined as “high earners” (making more than $250,000 a year for a married couple), they will be required to pay the Medicare tax.
Calculating the tax:
proft from the sale – capital gains threshold = taxable investment income
taxable investment income x 0.038 (3.8%) = tax due
Using the above formula, Bob and Susie would plug in these values:
profit from the sale: $750,000
capital gains threshold: $500,000 (married couple filing jointly)
taxable investment income: $750,000 – $500,000 = $250,000
tax due: $250,000 x 0.038 (3.8%) = $9,500
Example 2: Meet Frank and Cindy, a married couple whose combined income totals $200,000. They are selling their home for $400,000. Frank and Cindy are excluded from the 3.8% tax because they do not meet the “high earner” criteria (income of $250,000 or more).
Example 3: Frank (from Example 2) gets a promotion and begins making $50,000 more a year. This pushes Frank and Cindy’s combined income to $250,000, which now qualifies them as “high earners.” They finally sell their home for $400,000, but after paying their mortgage and the fees associated with a real estate transaction, they take home $50,000 as profit from the sale of their home. They are again excluded from the tax thanks to the capital gains threshold of $500,000 for married couples filing jointly (they would need to take home $500,000 or profit more from the sale of their home to be required to pay the Medicare tax in the health care bill.
Thanks to Joe Sheehan for pointing out the mistake in the post. I’ve changed it to fix the calculation error.
This new tax on investment income does not go into effect until tax year 2013.
photo courtesy of Listener42
Email This Post
Print This Post
« Fiesta San Antonio – Saturday April 24, 2010 Events | Home | Fiesta San Antonio – Sunday April 25, 2010 Events »
Comments
From the way I understand this, (and I am not a CPA or tax advisor), is that if I make 100K per year as a single filer and sell one of my rental properties for a 75k profit, I will not have to pay any additional tax (just capital gains tax). Because the property was an investment property it is not exempt from capital gains, but because I did not make 200k in income I do not have to pay the 3.8% additional tax, is that correct?
Jay – In your example, your income would preclude you from this new tax as you stated. Of course, any existing taxes would still be owed. So far, this is my understanding of the tax within the health care bill.
Of course, checking with a CPA or tax advisor/accountant is always your best defense.
.-= rerockstar´s last blog ..Find Affordable Housing Programs With TxHomePrograms.com =-.
This is still a tax regardless of what the administration calls it in order it (for it to be more emotionally acceptable) and I plan on reading the actual text after finishing this comment-which is better than reading someone’s opinion. Eventually it will be revised to capture taxes from lower income earners.
Suz has it right. In spite of what is currently in the bill, income threshholds can change at the whim of the Czars who now control the execution of this and other bills produced by the Obama administration. They are bent on redistribution of wealth. There’s no two ways about it. They NEED TO BE STOPPED! Educate yourselves and others and Vote for restoration of the Constitution of our founding fathers. It’s almost too late, but we can do it.
Chris;
the term czar, which has gained popularity in the last two years was first used during Roosevelts administration when he appointed 11 (so called czars) All presidents since him appointed less than him including Clinton (8) until… George W. Bush who exceeded that by appointing…..31!. Yes Obama beat that at 38. However total appointments? W. reached 47 while O is still at 43. Both probably too much, but when you ask us to educate ourselves, I must say I agree— we should ALL educate ourselves more.
Everyone – I appreciate your comments and although we have moved a bit into the political implications, I appreciate your thoughts and manner of handling it (I don’t like to hear some of the nastier pro/con arguments on this site, as I feel there are plenty of places to voice political opinions and some of the “fights” have just turned nasty amongst both sides).
More ways for the man to rob from the rich. Distribution of wealth by law and not by personal choice or benevolence.
From example 2 and 3 above it appears that if Frank and Cindy make $249,000 in their “real jobs” then they could in theory make $6 million in investment income and not be required to pay the medicare tax. But if they make one dollar more ($250,000) then the medicare tax would kick in and they would then owe $209,000 more as a result of earning that $1.
Am I reading this correct and if so this would violate my sense of fair because earning $1 more should never trigger a tax increase of more than the highest marginal tax rate (currently 36 cents on $1).
Obviously, in my question above I mean the income figure to read 249,999 (not 249,000)
Tom – Great question. I’ll have to see if I can do some research and get a solid answer, but based on ways other sort of benchmark actions happen, I’m going to guess your example would prove true. If it is true that one dollar could make all the difference, imagine a couple who each make $125K and one of them has to ask for a scale back in pay to $124K in order to avoid such a tax hit.
PS Love the “reasons you may not vote for me” section of the site.
Just remember folks this is how the income tax got started . . . not to exceed 3% and only the rich would ever have to pay . . . now look!
when will we ever learn you give govmt an inch it will eventually take a mile!!!
pawhuska – While I certainly understand your fear and concern over the government “taking a mile” I’m often dismayed when I read statements like this. Why? Because, the government could take that mile anyway. Yes, it is always worrisome that there will be more or new taxes, then again, there will be anyway. Regardless of which party you believe in, when push comes to shove and money is needed to fund programs, pay debt, fight wars, or anything else – there is one main source. Taxes.
While tax cuts do indeed help, they too are not a long term solution. And it’s a dicey game as to what the people will do with the money they now have thanks to the tax cut – will they spend it, save it, hide it under a mattress? Will businesses hire more people, increase wages, save for emergencies, buy new equipment – what they do with their money is crucial to both the overall economic picture (jobs being the big piece at the moment), but also to the ebb and flow of liquidity in the country.
Take banks for instance, they’ve come out of all this and are now making profits…big profits. In a down economy, we could certainly use them putting some of that cash back into the system – through new jobs (hire a few loss mitigators to make robo-signing a thing of the past) and loans (lending requirement have swung so far in the other direction that even people on solid financial ground have had a hard time getting loans). Instead, they’re sitting on those profits and without that cash being put back into our economy by being spent, we’re all losing out on the long term benefit of growth.
Let’s not fool ourselves, we need to control our government’s spending, but we also need to buck up and pay taxes to do so more often than not.
Trackbacks
Leave a Comment