• There is a 3.8 percent 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 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, however it’s a complicated tax so we can’t predict how it will affect 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 cou;les 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 percent 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 thrshold (of $200,000 for individuals or $250,000 for married couples).
• For example, a married couple has an AGI of $325,000.  They purchased a home in California many years ago for $350,000 and sold it this year (2012) for $900,000, making a profit of $550,000.  After excluding $500,000 from their gain of the sale, they are left with $50,000 investment income.  Since their AGI is $75,000 over the married threshold amount the lesser amount of $50,000 would be subject to taxation – at 3.8 percdnt they would owe $1,900.
• Real estate investors are not affected at the time they acquire their investment.  Their rental income could be subject to the tax, but only on NET rents (after expenses, including interest, taxes and depreciation).

Background

• The legislation was enacted on March 23, 2010.
• The tax was not introduced, discussed or reviewed until hours before the final debate on the massive health care legislation began.  NAR (National Association of Realtors) expressed its strongest possible objections, but the legislation passed on a largely party-line vote.
• Any revenue collected by the tax is dedicated to the Medicare hospital insurance fund, which is why the new tax is somtimes referred to as the “Medicare tax”.
• The legislation also included a 0.9 percent tax on the “earned” income (salary, wages, commissions) of high-income taxpayers:  those with AGIs over $200,000 for individuals and $250,000 for married couples.  The tax is only imposed on the income over the threshold amount.
• Examples and further analysis is presented in NAR’s brochure:  The 3.8% Tax Real Estate Scenarios & Examples.
• A video that explains the issue in further detail is posted online at http://speakingofrealestate.blogs.realtor.org/2010/11/24/the-3-8-tax-is.

The above information was last updated July 2012 and is from the National Association of Realtors website at www.realtor.org.

On January 1, 2013 both the Senate and House passed H.R. 8 legislation to avert the “fiscal cliff”.  The bill will be signed shortly by President Barack Obama.

Below is a summary of real estate related provisions in the bill:

Real Estate Tax Extenders

• Mortgage Cancellation Relief is extended for one year to January 1, 2014
• Deduction for Mortgage Insurance Premiums for filers making below $110,000 is extended through 2013 and made retroactive to cover 2012
• 15-year straight-line cost recovery for qualified leasehold improvements on commercial properties is extended through 2013 and made retroactive to cover 2012
• 10 percent tax credit (up to $500) for homewoners for energy improvements to exisiting homes is extended through 2013 and made retroactive to cover 2012

Permanent Repeal of Pease Limitations for 99% of Taxpayers

Under the agreement so called “Pease Limitations” that reduce the value of itemized deductions are permanently repealed for most taxpayers but will be reinstituted for high income filers.  These limitations will only apply to individuals earning more than $250,000 and joint filers earning above $300,000.  These thresholds have been increased and are indexed for inflation and will rise over time.  Under the formula, the amount of adjusted gross income above the threshold is multiplied by three percent.  That amount is then used to reduce the total value of the filer’s itemized deductions.  The total amount of reduction cannot exceed 80 percent of the filer’s itemized deductions.

These limits were first enacted in 1990 (named for the Ohio Congressman Don Pease who came up with the idea) and continued throughout the Clinton years.  They were gradually phased out as a result of the 2001 tax cuts and were completely eliminated in 2010-2012.  Had we gone over the fiscal cliff, Pease limitations would have been reinstituted on all filers starting at $174,450 of adjusted gross income.

Capital Gains

Capital Gains rate stays at 15 percent for those in the top rate of $400,000 (individual) and $450,000 (joint) return.  After that, any gains above those amounts will be taxed at 20 percent.  The $250,000/$500,000 exclusion for sale of principle residence remains in place.

Estate Tax

The first $5 million dollars in individual estates and $10 million for family estates are now exempted from the estate tax.  After that the rate will be 40 percent, up from 35 percent.  The exemption amounts are indexed for inflation.

The above information was taken from the National Association of Realtors website www.realtor.org/articles.