Does the Health Care Bill Have a Tax on Real Estate Sales?

In a word, yes.  But according to FactCheck.org, few taxpayers will be subject to the new tax. But beware DC and Northern Virginia homeowners…the numbers indicate that more of us are at risk of being subject this tax.

Few people realize that buried in the recent health care legislation is a tax that affects home sales–3.8% to be exact. As most homeowners know, one of the primary benefits of selling your home is that a significant portion of any profit–$250,000 for a single taxpayer and $500,000 for a married (filing joint) taxpayer–is completely tax free if you’ve lived in the home two out of the last five years.  Yes, you read that right.  Completely tax free.  And that part  is STILL true.

The part that’s new is a tax on the profit above that exemption amount for taxpayers in certain brackets. If a single taxpayer makes more than $200,000, or for marrieds above $250,000, they are subject to a new 3.8% tax on the profit above that exempted amount starting in 2013.

Knowing the DC area has several of the highest per capita income counties in the country (four of the top ten, in fact), and given historical returns on real estate in our area (yes, even after the bubble burst), there are quite a few homeowners in our area who could get hit with this tax.

For example, let’s say a single homeowner purchased in 2001 for $300,000 in North Arlington.  That taxpayer’s home might  now be worth $600,000 (which is not unusual for someone who purchased prior to the big run-up in prices we experienced from 2003-2006).   If that taxpayer makes more than $200,000 in AGI, she will be subject to tax of 3.8% * (300,000 profit – 250,000 exemption) = $50,000 taxable profit = additional $1900 tax on the sale of her home (in addition to capital gains taxes) .

Plan those sales accordingly, especially you long-term homeowners.   If you have significant appreciation in your property, and are above those income limits, you may want to ‘cash out’  between now and 2012 to save 3.8%.

Read More: Reasons to Sell Your Investment Property in 2010

If you’re thinking of buying or selling a Northern Virginia or DC investment property, contact us to discuss how we approach real estate from a different angle.

Update 7/17/2010:  This issue is finally getting some press, sort of.  WaPo has an article entitled “Debunking Rumors of a Housing Sales Tax.”  Despite the headline, the body of the article proceeds to spell out the circumstances under which there IS a tax on home sales. Just because people under certain income limits or profit margins aren’t charged the tax doesn’t mean that the tax doesn’t exist for other people. Maybe we need to work on the definition of “rumor”??

Update 11/21/2010: Here’s a good article that clarifies the tax and how to calculate it, and gives a simple example for a “high income” taxpayer.  It states “Complicated? Yes. Let’s look at these examples. Your adjusted gross income is $150,000. You sell your house and made a profit of $400,000. There is no change in the way you determine your gain: You take your purchase price, add any major improvements you have made over the years, and subtract that number from the net sales price…..

let’s assume you strike it rich and have made a profit of $600,000. Your income is $300,000. You can exclude only $500,000 under current law, so you will have to pay capital gains tax on the remaining balance. The rate currently is 15 percent, so you will owe Uncle Sam $15,000 ($100,000 multiplied by 15 percent)…But since your income is over the threshold, you now also have to pay the 3.8 percent tax. But on what amount?

As indicated earlier, the tax is based on lesser of your profit or the difference between the threshold and your income. Your profit is $100,000. The difference between your income and the threshold is $50,000 ($300,000 minus $250,000). In our example, the lower number is $50,000, and you will have to pay an additional $1,900 to the Internal Revenue Service (3.8 percent multiplied by $50,000).”

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One thought on “Does the Health Care Bill Have a Tax on Real Estate Sales?

  1. Katie,

    Your article is enlightening. The one thing that needs to be mentioned is that the profit gained is considered income and pushes many people above the $200k/$250k mark. If you are upsizing then the impact is not so great but if you are downsizing as with empty nesters and retirees the impact is great. This is especially true if you choose not to buy another home and decide to rent or put your money into senior apartments or assisted living. Now the government takes a bigger chunk of your nest egg set for your golden years.

    What a nice reward for all those years of hard work!

    Regards,

    Russell

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