A Brief Explanation of the "Rumored" 3.8% Sales Tax on Real Estate

Every so often I get emails and phone calls from people that have heard about this new sales tax and they are totally freaked out, blaming Obama for his Health Care bill and more taxes. Take a deep breath,calm down, and read the following explantion to put yourself at ease... Section 1402 of HR 4872, the Health Care and Education Affordability Reconciliation Act of 2010 which President Obama signed into law on March 23, 2010, does have some interesting provisions. First, let's be perfectly clear: THERE IS NOT ABOUT TO BE A 3.8% SALES TAX ON ALL REAL ESTATE SALES. It is true that, beginning January 1, 2013, there will be yet another new tax imposed. But it won't be imposed on everyone, and only in certain situations will it apply to income derived from a sale of real estate. The tax only applies to so-called "high income" tax payers: Singles whose adjusted gross income (AGI) is over $200,000 and married couples whose adjusted gross income is over $250,000. The new tax is 3.8%, and it is a surcharge. It is a tax added to the regular taxes paid on income. To understand how the tax works, we need to remember that adjusted gross income (AGI) is a combination of what Washington calls "earned income" (essentially, your day job) and "unearned income" (income from capital gains, net rental income, dividends, and interest). Sometimes "unearned income" is called "investment income". Here is how the tax applies: If you are a "high income" tax payer, then the 3.8% tax will be imposed on the lesser of the following: Either (a) the amount by which your adjusted gross income exceeds the limit($200,000 for a single or $250,000 for a married couple) Or (b) the total of your "unearned income" Example 1: A couple earns $200,000 in their regular jobs; plus they have net rental income of $100,000. Earned income = $200,000 Investment income = $100,000 AGI (adjusted gross income)= $300,000 Excess of AGI over limit= $ 50,000 limit for couples is $250,000) Lesser amount of either (a) or (b) [see paragraph above] $ 50,000 (the total of "unearned income" was $100,000) Tax surcharge due= $ 1,900 ($50,000 x .038) Example 2: A couple earns $400,000 in their regular jobs; plus they have net rental income of $50,000 and also a $50,000 capital gain from the sale of an investment property. Earned income = $400,000 Investment income= $100,000 AGI = $500,000 Excess of AGI over limit= $250,000 Lesser of either the excess over AGI or the total "unearned income" = $100,000 Tax surcharge due= $ 3,800 ($100,000 x .038) So, IF you are a high income earner, and IF the tax surcharge is applied to your "unearned income", and IF that income included capital gains from the sale of real estate, then, yes, the tax will apply to at least some of the proceeds of the real estate sale. Note, if a personal residence is sold, then the capital gains exclusions that now exist will still apply. The only gain that might be taxed would be that which exceeded the exclusion limits ($250,000 for singles, and $500,000 for married couples). The tax surcharge is sometimes called a Medicare Tax. This is because that is where the money will go. The National Association of Realtors (NAR) has put out a couple of brochures on this topic and should you want more information, please contact me and I will forward them to you. The Frequently Asked Questions (FAQ) brochure is probably an easier read. The longer brochure contains a lot of examples. So now you have the skinny on this subject!