Many of you have heard rumors or even read emails that are being circulated that state all home sales will be hit with a 3.8% sales tax after December of 2012. This information is a total mis-characterization of the actual tax that is being charged.
Here is a list of the Top Ten Things to know about the 3.8% Medicare tax:
1- When you add up all of your income from every possible source, and that total is less than $200,000 ($250,000 on a joint tax return), you will not be subject to this tax.
2- The 3.8% tax will never be collected as a transfer tax on real estate of any type, so you’ll never pay this tax at the time that you purchase a home or other investment property.
3- You’ll never pay this tax at settlement when you sell your home or investment property. Any capital gain you realize at settlement is just one component of that year’s gross income.
4- If you sell your principal residence, you will still receive the full benefit of the $250,000 (single tax return)/$500,000 (married filing joint tax return) exclusion on the sale of that home. If your capital gain is greater than these amounts, then you will include any gain above these amounts as income on your Form 1040 tax return. Even then, if your total income (including this taxable portion of gain on your residence) is less than the $200,000/$250,000 amounts, you will not pay this tax. If your total income is more than these amounts, a formula will protect some portion of your investment.
5- The tax applies to other types of investment income, not just real estate. If your income is more than the $200,000/$250,000 amount, then the tax formula will be applied to capital gains, interest income, dividend income and net rents (i.e., rents after expenses).
6- The tax goes into effect in 2013. If you have investment income in 2013, you won’t pay the 3.8% tax until you file your 2013 Form 1040 tax return in 2014. The 3.8% tax for any later year will be paid in the following calendar year when the tax returns are filed.
7- In any particular year, if you have no income from capital gains, rents, interest or dividends, you’ll never pay this tax, even if you have millions of dollars of other types of income.
8- The formula that determines the amount of 3.8% tax due will always protect $200,000 ($250,000 on a joint return) of your income from any burden of the 3.8% tax. For example, if you are single and have a total of $201,000 income, the 3.8% tax would never be imposed on more than $1,000.
9- It’s true that investment income from rents on an investment property could be subject to the 3.8% tax. But: The only rental income that would be included in your gross income and therefore possibly subject to the tax is net rental income: gross rents minus expenses like depreciation, interest, property tax, maintenance and utilities.
10- The tax was enacted along with the health care legislation in 2010. It was added to the package just hours before the final vote and without review. NAR strongly opposed the tax at the time, and remains hopeful that it will not go into effect. The tax will no doubt be debated during the upcoming tax reform debates in 2013.
this information was provided by the National Association of REALTORS
The NAR recently published a video that helps to clear up the confusion, also:
Finally, the guide below will walk you through the tax, what it is and what it is NOT and provides scenarios to help you better understand if you will be impacted. The truth is that only 2-3% of the population should be impacted by this legislation, which is very different than what you may have heard.
I hope these informative tools help you to better understand the truth behind the 3.8% tax and what it really means to most home sellers.
If you are considering selling your home and want to meet to discuss this issue, or any other real estate matter, I am here for you!
Lesley Lambert, Park Square Realty, 413.575.3611
