3.8% Tax Will Go Into Effect. What Is It Really?

A few months back I addressed a viral email that seems to make the rounds every few months about a new “sales tax” on all real estate transactions.  The email is false in the way it states what the new tax is.  So what is the new tax tied to the health care bill regarding real estate?  Here is a quick synopsis from the Realtors…

3.8% Tax Will Go Into Effect in 2013

Now that the Supreme Court has upheld the health care legislation, all of its major provisions remain in effect, including the new tax that was designed to affect upper income taxpayers. The 3.8% tax is imposed ONLY on those with more than $200,000 of Adjusted Gross Income (AGI) ($250,000 on a joint return). The tax applies to investment income, defined as interest, dividends, capital gains and net rents. These items are all included in an individual’s AGI. A formula will determine what portion, if any, of these types of investment income would be subject to the tax.

The tax is NOT a transfer tax on real estate sales and similar transactions. Not long after the tax was enacted, erroneous and misleading documents went viral on the Internet and created a great deal of misunderstanding and made the tax into something far more draconian than the actual provisions.

The new tax does NOT eliminate the benefits of the $250,000/$500,000 exclusion on the sale of a principal residence. Thus, ONLY that portion of a gain above those thresholds is included in AGI and could be subject to the tax.

The National Association of Realtors has also created a pamphlet with more information and sample scenarios.