The new 3.8% Real Estate Tax (that isn't really a Real Estate Tax - but it can be - depending - maybe)

The New Real Estate Tax (which isn’t really a real estate tax)

The big question I have been getting lately from some clients who are thinking about selling their homes has been “How much is that new Real-Estate-Health-Care-Tax going to cost me when I sell my home?” The most correct answer I can give them is “I don’t know”.

Wow – that was helpful, huh? And you thought I was just another uneducated sales person.  Now just sign this contract here and we can….oh, you were hoping for a bit more information than that? Okay, well in order to make my broker, my attorney and my accountant happy, first let me say that I am not a CPA, an accountant, an attorney or in any other manner representing that I am licensed or qualified to dispense income tax advice. The information here is soley for example and educational purposes. I recommend and advise that you consult any and all professionals to get advice on taxes, tax filing and payment of income taxes. Also, I would highly advise that you do not look up when a pack of seagulls is flying overhead, do not go outside when it is raining while only wearing socks, be aware that hot coffee is hot and should be treated as such, and, politicians don’t always lie – only when their lips are moving.  There, now that the ‘fine’ print is taken care of, let’s move on to seriously answering this question.

First off, this is being called a “Real Estate Tax” on the internet and elsewhere (even in my blog title - seriously, who writes this stuff?); that is a misleading statement. The tax itself is imposed (when applicable) on some income from interest, dividends, rents (less expenses) and capital gains (less capital losses). This income or gain can be derived from Real Estate; however, it can also be derived from other sources such as stocks, securities, or the sale of non Real Estate assets. So, if the Real Estate in question produces income or gains through the leasing or sale of said Real Estate, then that income may be subject to the 3.8% tax. However, there are also other factors that help determine if this is the case

Secondly, when determining whether or not any of the above income or gains is subject to this new tax, you must also look at the Adjusted Gross Income (AGI) of the filer (or filers). This tax does not apply to anyone who is single and has an AGI of less than $200,000 or married and filling jointly with an AGI of $250,000.

Now that we have established that this only applies to certain types of income or gains, and we have established that it only applies to single filers above $200,000 or married joint-filers above $250,000, we are still not quite done. There is a formula that is used to determine just how much of this income is actually taxable. The tax applies to the lesser of: Investment income amount as a function of the amount above the AGI threshold. We should also not forget that if the gain is realized on the sale of a primary residence, then a certain amount of that gain may also not be taxable depending on your individual circumstances.

Whereas (I love that word, don’t you? I never miss a chance to use it) we have established when the tax does and does not apply, I can absolutely and affirmatively answer that question for my clients with a clear and defined “I don’t know”. In most cases, this is not going to affect the sale of your home if you are realizing a gain of less than $250,000 or $500,000 depending on your familial status (note where that said a ‘gain’ – not the total sale price – big difference)

If you would like more information on how this 3.8% tax could be applied with particular examples, the National Association of Realtors published a booklet on this topic. You can find it here: NAR3.8% Healthcare Tax Brochure.

I do hope you enjoyed this stroll through the exciting world of the tax code. I tried to make it a little less boring, but in the end, taxes are just not that funny. I always advise my clients to discuss these matters with an accountant or CPA that specialize in these types of transactions. I have a great referral database of professionals for my clients when these questions come up.

As always, please contact me with your Real Estate related questions at www.JasonGault.com. Happy Selling!