By Kenneth R. Harney
July 13, 2012
When the Supreme Court upheld the health care reform law
on federal tax grounds, it restoked a housing issue that had been relatively
quiet for the past year: The alleged 3.8 percent "real estate tax" on
home sales beginning in 2013 that is buried away in the legislation.
Immediately following enactment of the health care law,
waves of emails hit the Internet with ominous messages aimed at homeowners. A
sample: "Did you know that if you sell your house after 2012 you will pay
a 3.8 percent sales tax on it? When did this happen? It's in the health care
bill. Just thought you should know."
Once litigation challenging the law's constitutionality
surfaced in federal courts, the email warnings subsided. But with the law
scheduled to take effect less than six months from now, questions are being
raised again: Is there really a 3.8 percent transfer tax on real estate coming
in 2013? Does it pre-empt the existing $250,000 and $500,000 capital gains
exclusions for single-filing and joint-filing home sellers, as some emails have
claimed?
In case you've heard rumors or received worrisome emails
about any of this, here's a quick primer. Yes, there is a new 3.8 percent
surtax that takes effect Jan. 1 on certain investment income of upper income
individuals - including some of their real estate transactions. But it's not a
transfer tax and not likely to affect the vast majority of homeowners who sell
their primary residences next year. In fact, unless you have an adjusted gross
income of more than $200,000 as a single-filing taxpayer, or $250,000 for
couples filing jointly ($125,000 if you're married filing singly), you probably
won't be touched by the surtax at all, though you could be affected by other
changes in the code if Congress fails to extend the Bush tax cuts scheduled to
expire at the end of this year.
Even if you do have income greater than these thresholds,
you might not be hit with the 3.8 percent tax unless you have certain types of
investment income targeted by the law, specifically dividends, interest, net
capital gains and net rental income. If your income is solely
"earned" - salary and other compensation derived from active
participation in a business - you have nothing to worry about as far as the new
surtax.
Where things can get a little complicated, however, is
when you sell your home for a substantial profit, and your adjusted gross
income for the year exceeds the $200,000 or $250,000 thresholds. The good news:
The surtax does not interfere with the current tax-free exclusion on the first
$500,000 (joint filers) or $250,000 (single filers) of gain you make on the
sale of your principal home. Those exclusions have not changed. But any profits
above those limits are subject to federal capital gains taxation and could also
expose you to the new 3.8 percent surtax.
Julian Block, a tax attorney in Larchmont, N.Y., and
author of "Julian Block's Home Seller's Guide to Tax Savings," says
it will be more important than ever to pull together documentation on the capital
improvements you made to the property and expenses connected with the house -
including settlement or closing costs, such as title insurance and legal fees -
that increase your tax "basis" in order to lower your capital gains.
Since the health care law targets capital gains, you
could find yourself exposed to the 3.8 percent levy on the sale of your home
next year. Here's an example provided by the tax staff at the National
Association of Realtors. Say you and your spouse have adjustable gross income
(AGI) of
$325,000 and you sell your home at a $525,000 profit.
Assuming you qualify,
$500,000 of that gain is wiped off the slate for tax
purposes. The $25,000 additional gain qualifies as net investment income under
the health care law, giving you a revised AGI of $350,000. Since the law
imposes the 3.8 percent surtax on the lesser of either the amount your revised
AGI exceeds the $250,000 threshold for joint filers ($100,000 in this case) or
the amount of your taxable gain ($25,000), you end up owing a surtax of $950
($25,000 times .038).
The 3.8 percent levy can be confusing, and can bite
deeper when your taxable capital gains are far larger or you sell a vacation
home or a piece of rental real estate, where all the profits could subject you
to the investment surtax. Definitely talk to a tax professional for advice on
your specific situation.
Adam Simmons
Crystal Clear Mortgage LLC
888-634-6911
www.CrystalClearMortgage.com
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