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Is There a New 3.8% Sales Tax on Real Estate?

We were asked:

I am trying to find out if it is true that homeowners selling after Jan 1 2013 will have to pay a 3.8% sales tax on their sale. I have asked a couple of realtors but on one can give me an answer. I get emails all the time claiming that this is a part of Obamacare in order to pay for it.

We get this question all the time. There was an extremely popular email that claimed such, and the idea gained new life as 2013 rolled around.

As with most tax questions the answer is: it depends. However calling the tax a 3.8% sales tax is disingenuous at best, and it wrongly implies that selling your house for $100,000.00 would yield an additional $3,800.00 tax. The reality is that the majority of tax payers will not hit the necessary thresholds to trigger such an event. However, some will and they need to plan accordingly.

 

Who Will be Affected by the 3.8% Medicare Contribution Tax?

What is true is that taking effect immediately on January 1, 2013, there will be a 3.8% Medicare surtax imposed on a taxpayer’s “net investment income” (NII) and it will generally apply to passive income. The Medicare surtax also will apply to capital gains from the disposition of property, and as such it could apply to taxpayers who both: a) sell their homes and make a taxable profit (remember, for many married couples the first $500,000.00 gain of their principle residence may be excluded, $250,000.00 for most single persons) and b) meet the below MAGI thresholds.

Additionally for individuals, the Medicare surtax is based on the lesser of the taxpayer’s NII or the amount of “modified” adjusted gross income MAGI above a specified threshold. 

 

The MAGI thresholds are:

• $250,000 for married taxpayers filing jointly or a surviving spouse;
• $125,000 for married taxpayers filing separately; and
• $200,000 for single and head of household taxpayers.

 
NII includes:

• Gross income from interest, dividends, annuities, royalties, and rents, provided this income is not derived in the ordinary course of an active trade or business;
• Gross income from a trade or business that is a passive activity;
• Gross income from a trade or business of trading in financial instruments or commodities; and
• Net gain from the disposition of property, other than property held in an active trade or business.

 
Questions to Discuss With Us:
  • Is my household over the MAGI threshold, will it be in the future?
  • Are my investment gains passive or active?
  • How will other new tax changes affect me?
  • Should I schedule or structure sales of assets differently?
  • Do I need to reconsider the design of my business entities?

For more information or if you are concerned that the tax will affect you, please contact our office.

Additionally, the national association of realtors has a few examples focusing on real estate sales here.