Thinking of Selling your Home? Then You Should Know if the New 3.8% Tax Applies to You.
Maybe you’ve heard of the new 3.8 percent tax on real estate. If so, chances are you’ve been listening to a number of rumors circulating on the Internet. In truth, the 3.8 percent tax isn’t a real estate tax at all; it’s a capital gains tax.
The Truth About the Tax
The 3.8 percent was added to health care reform legislation in the final hours before the vote in 2010. It was never reviewed by legislators before the vote. The National Association of Realtors does not support the tax and has hopes it will not go into effect.
The tax is a capital gains tax not a real estate tax. For this reason, it is not calculated at the time of a sale. Conversely, you will never pay the tax when you purchase a property. Because it is a capital gains tax, it applies to not only real estate but other forms of investment income such as investment income from rents after expenses, dividend income and interest income.
The new tax goes into effect in 2013 but it will not have any impact until 2014. All gains will not be taxed until the following calendar year when income taxes are filed. For example, gains in 2013 won’t be taxed until Form 1040 is filed in 2014.
Does the Tax Apply to You?
It is estimated only 2-3 percent of home sellers will be affected by the tax. In order for the tax to affect you, you must meet the following requirements.
- Your home sale gain must be higher than the $250,000 allowed for single filers and the $500,000 allowed for joint filers for capital gains.
- Only the amount above the exclusion would be taxed.
- This only applies if you are a high income household. As defined by law, a high income house is a single filer earning $200,000 or more or joint filers earning $250,000 or more.
Tom and Jane have a gross adjusted income of $325,000. They sold their home and had a gain of $525,000. Their taxable gain is $25,000: $525,000 less the $500,000 allowed for capital gains.
Their new gross adjusted income is $350,000. This amount is their original income amount plus their taxable gain.
So how much tax do Tom and Jane owe? Because they are a high income household, $250,000 must be subtracted from the $350,000. The total, $25,000, is their taxable gain. This amount is then multiplied by 3.8 percent. Tom and Jane owe $950.
This is just an example. Only a tax attorney or a tax preparer can determine if the tax applies to you.