9/19/2012 7:52 PM ET|
Know the facts on new 3.8% tax
It's been the subject of inaccurate emails and mislabeled as a sales tax. Find out about this real-estate levy -- and if you will be affected.
If you haven't gotten the scary email about the 3.8% real estate tax that's about to take effect, just wait. You probably will see it as the tax's effective date draws near.
Various versions of this email have been frightening and angering people since 2010, when the health care legislation that contains the tax was approved. Unfortunately, these emails get most of the facts wrong. But then, so do some of the tax's defenders.
Here's the scoop:
● It's not true that the tax, scheduled to start Jan. 1, will affect all home sales, or even most home sales. It won't cost you $3,800 in taxes to sell a $100,000 home, or $15,200 if you sell a $400,000 home, as the emails claim. "Some of the emails treat it as if it were a tax on the total sales price," said attorney Mark Luscombe, a CPA and principal federal tax analyst for tax research firm CCH. "It's not a sales tax."
● It's not true that the National Association of Realtors is working to get the tax repealed. In fact, the association has been trying to counteract what a spokeswoman called "grossly inaccurate" rumors about the levy.
● But it's also not true that the tax will affect only the very rich, as some pundits have said. In some circumstances, it could affect people who wouldn't normally be considered wealthy.
To find out if the tax could affect you, or anyone you know, read on.
The tax is designed to raise an estimated $210 billion to fund Medicare and health care reform. It's a tax on so-called "unearned" income, including investments, rental income and home sale profits over a certain exemption amount ($250,000 for singles, $500,000 for married couples).
All this unearned income is already subject to ordinary income taxes or capital gains taxes. The new 3.8% tax would be added only for some individuals with incomes above $200,000 or some married couples with incomes more than $250,000, Luscombe said.
This is complicated stuff, which is part of why it's so easy to misunderstand. So follow along with this illustration: Let's say that Don and Donna bought a home in Southern California in 1965 for $50,000. Today, the home is worth $650,000. If the couple sold the house, their profit would be $600,000 (for now, we'll ignore the costs of selling and home improvements, which typically would reduce that number).
The first $500,000 of that profit would be tax-free, thanks to a federal law that went into effect May 6, 1997. The remaining $100,000 would be subject to a capital gains tax rate of up to 20% (the maximum capital gains tax rate is currently 15%, but that's scheduled to rise in 2013). It might also be subject to the 3.8% tax.
The next step is to add the $100,000 profit (or "net investment income") to Don and Donna's adjusted gross income. If the profit pushes their AGI over $250,000, the new tax would apply to either:
- The net investment income amount -- the profit over the exemption limit of $500,000 ($250,000 for singles).
- The amount that their AGI exceeds $250,000 ($200,000 for singles) in income
Don and Donna would owe tax on whichever of those two options is less.
Head spinning yet? Here's how it would work in our example.
If the couple's AGI was $50,000 without the home sale and $150,000 with it, they wouldn't be subject to the 3.8% tax. (They'd still have to pay the capital gains tax, however, which would be $20,000 on their $100,000 of profit above the exemption limit.)
If, on the other hand, their AGI was $200,000 and the remaining home sale profit pushed it to $300,000, they (or their tax software or their accountant) would compare the amount more than $250,000 ($50,000) with the amount of investment income ($100,000) and pay the 3.8% tax on the lower of those two amounts. So they would pay an additional $1,900 (3.8% of $50,000).
Are there circumstances when the tax could affect people who aren't big earners? You bet. If the home profit is large enough, it could push anyone into a bracket where that person might face the tax.
Let's assume now that Don and Donna's house sold for $900,000. After deducting the home's cost (and once again ignoring the costs of selling and improvements), their profit is $850,000. Subtract their $500,000 exemption, and you're left with $350,000. That's enough to trigger the tax, even if their AGI before the home sale was zero. Then they'd owe an additional $3,800 (3.8% of $100,000, the amount of net investment income over the $250,000 AGI limit), on top of capital gains taxes on the $350,000.
It's safe to say that the vast majority of home sellers won't pay this new tax, at least at this point. In July 2012, the median sales price for existing homes was $181,500, according to the National Association of Realtors. That means half of homes sold for less. Homes that sold for more than $500,000 accounted for just 11% of home sales.
But it's not reasonable to assume that all of those sales would have faced the tax, since some of the homes might have been sold at a loss and others would have less than the required appreciation to trigger the tax. As I noted earlier, the costs to sell a home, and improvements made to the house over the years, can shrink the potentially taxable profit on a home sale, sometimes dramatically.
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Congress, however, hasn't adjusted the $250,000/$500,000 home sale exemption amount for inflation. So conceivably, more folks could face the tax in the future, especially if they live in high-cost areas or have a lot of appreciation in their homes.
If you think you, or your folks, could be subject to this new tax, it might be smart to sit down with a tax professional to talk about alternatives. Closing a home sale before Dec. 31 -- or selling investments that could trigger the tax -- could save some money. Then again, such sales might not be prudent. For example, if your parents bequeath their home to you at their death, rather than selling it now, all the gains during their lifetimes would be essentially tax-free -- you may not owe any income or capital gains tax if you sell soon after you inherit (although their estates may owe taxes, if those estates are large enough).
In other words, don't let the tax tail wag the investment dog: Get good advice, and make sure any sales fit in with a long-term financial strategy.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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Still a tax. They were not writing a health care bill, they were just screwing all of us.
I will never pay the tax or even the capital gains tax. I am not in the inclome bracket or the housing where this tax may be applied.
But, I do see the long history of our supposedly elected officials mis-representing us and screwing up the government with these type of decisions on taxes, regulations and unions. This has got to stop no matter who is elected.
I saw all the dreamy eyed supporters of Obama when he got elected. Probably the same for Pelosi and Reid supporters. People, there is no one person that is magical and will wipe away your troubles. If you believe there is, I have a Brooklyn Bridge I would like to sell you.
As pointed out Messa Dave, once taxes are put in place in new areas, they likely will only increase.
This tax will likely not directly effect many people actually needing to pay it as a line item on their tax return. However, any taxes, fees or expenses that are incurred by successful people or businesses who own rental property or those who make home sales profits will eventually be paid by everyone.
Even though I would not be considered rich, I do own several investment rental homes.. I work hard to maintain them and pay the loans, taxes and insurance every month. I make profit, but not a large amount. When the property tax goes up, the insurance goes up or a landlord needs to pay a 3.8% tax on their income as is also provided in this law for income considered as unearned income. What the landlord likely will do is raise the rent to cover those expenses. As a landlord or business owner if the expenses go up, you will raise your prices to include them. Then the working families that live in these homes will end up paying those new taxes, in effect they will get a tax rate increase and not even know it.
This concept works the same with all taxes and fees. If a company needs to pay more taxes, they likely will raise their prices to be able to stay in business or maintain thier profit margin. And then we all pay more. I think it is foolish to think otherwise.
If a "WEALTHY" person invests in Real Estate, as a primary or second home, it helps everyone, the MIDDLE CLASS and all classes! It helps maintain the value of their homes. It Prevents the home values from going down .
Because OBAMA does not understand that letting someone walk away from a loan hurts everyone around who has worked harder or taken a 2nd job to keep making their payments and not default.
When you got a mortgage, you agreed to pay an amount you knew about and took responsibility for. If now you decide not to pay it anymore or to short sell it, it hurts every other home owner on the same street as their home value will go down. For every 1 short sale the president pushed for, it killed the values of 10 homes and put 10 owners in trouble on that same street .
President Obama, make it tougher for people to walk away from their mortgage obligations, make the debt follow them beyond the foreclosure. You will see less foreclosures i guaranty you. Then this will help the Middle Class.
I have been in business in America all my life. Eight years ago I married a gal from China and have come to know their system and how it works. First, there are no taxes in China, no sales tax, income, capital gains, none! The official work week is 32 hours and there are 85 hollidays per year, not counting weekends. The most popular car for the working class is the American Buick. The people are encouraged to start a business and don't bother to tax them for the effort. They have one of the best health care systems in the world and is nearly free to the Chinese. How do they do it, I once asked? They have an export tax....Every time we buy something at Wal Mart, Sears, K- Mart, etc part of what we pay goes directly to the Chinese government via that tax. Then they loan some of that money back to us at interest to run our ineffecient, bloated government. They still have enough money left to offer their citizens free higher education and many other benefits. WE ARE TAXING Ourselves INTO THIRD WORLD STATUS......
Despite such explanations, this tax is but one of many that are to be imposed to finance Obamacare. Few knew about this plethora of taxes when Obamacare was being debated because they were concealed from everyone.
You pay realestate taxes while you own the home, then you pay more realestate taxes when you
sell the home. HMMMMM sounds like double dipping which is against the law in wis and you
cant do it.
But I guess if you re lying like somebodies president not mine I didnt vote for the pr**.
you can do anything. The last story was a cut in medicare professional help for people with
some chronic diseases, HMMMMMMM(again) sounds like a death panel to me.
You go to fix health care cant pay for it so you come up with bullsh** taxes to pay for it.
That on top of the 716 billion he stole from medicare to pay for this great improvement.
Then blames the GOP, NICE. sounds like the soviet union just before it crashed and burned.
This guy and his cronies in congress gotta go, Before theres nothing left. I always thought that
63 million people couldnt be wrong, guess its never under estimate the power of stupid people in
Time to get rid of the villiage idiot and ship him back to where ever the hell he came from
So basically this new tax will tax people about to retire in order to pay for their own medical coverage through medicare even though they have paid more than enough into the system. Makes perfect sense.
There's a $500,000 exclusion. How many of you even own a home worth $500,000 thanks to the tanking of the Real Estate market brought about by unregulated and high risk financial practices? You squawk about the pennies you pay in taxes but are oblivious to the dollars that never get into your paycheck in the first place.
Other than a few well heeled individuals who were lucky enough to make BIG bucks on their house and have high paying jobs, I can't see that the tax is going to affect more than a miniscule number of people.
I have owned three very nice homes. The last was 3700 Sq. Ft. in a Houston suburb. The total sales prices of the three homes didn't even add up to $500K.
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