To start, I must say that I am not a tax professional or an attorney. In fact, I have no desire to be involved in either of these professions (though I respect them) and urge you to seek counsel from someone other than a real estate professional writing a blog post.
First of all, it is not a sales tax nor does it impose any transfer tax or recordation tax. It is called a “Medicare Tax” because the money received will be allocated to the Medicare Trust Fund, which is part of the Social Security System. This tax will not affect everyone and in fact will impact a very small percentage of people selling.
People are confused for good reason. The actual legislation will make your head spin…take a look.
SEC. 1411. IMPOSITION OF TAX.
(a) IN GENERAL.—Except as provided in subsection (e)—
(1) APPLICATION TO INDIVIDUALS.—In the case of an individual, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax equal to 3.8 percent of the lesser of—
(A) net investment income for such taxable year, or
(B) the excess (if any) of—
(i) the modified adjusted gross income for such taxable year, over
(ii) the threshold amount.
(2) APPLICATION TO ESTATES AND TRUSTS.—In the case of an estate or trust, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax of 3.8 percent of the lesser of—
(A) the undistributed net investment income for such taxable year, or
(B) the excess (if any) of—
(i) the adjusted gross income (as defined in section 67(e)) for such taxable year, over
(ii) the dollar amount at which the highest tax bracket in section 1(e) begins for such taxable year.
(b) THRESHOLD AMOUNT.—For purposes of this chapter, the term ‘threshold amount’ means—
(1) in the case of a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), $250,000,
(2) in the case of a married taxpayer (as defined in section 7703) filing a separate return, 1?2 of the dollar amount determined under paragraph (1), and
(3) in any other case, $200,000
Throw me under a bus and call me stupid now because this makes absolutely no sense.
Instead of me trying to interpret the jibberish involved in this legislation, I will let the National Association of Realtors (NAR) utilize their resources. After all, the NAR has a vested interest in legislation that could affect the real estate market and all those involved. Their attorneys and accountants have been utilized to dissect this act and communicate the repercussions very well. In The 3.8% Tax is not a Real Estate Transfer Tax, Robert Freedman, Senior Editor of Real Estate Magazine, says the following:
Here’s how the tax works. For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. I say “might” because whether the tax applies or not depends on many factors having to do with the kind and amount of the investment income the household receives.
Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income.
Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.
Still confused? You should be. The National Association of Realtors has prepared a brochure outlining 8 income scenarios and the impact of this new law. Perhaps one of these scenarios may apply to you and your family.
Need more information on the 3.8% Real Estate Tax? Hopefully these resources will help…
“A Sales Tax When you Sell Your Home” by Stacy Johnson
“Top 10 Things You Need to Know About the 3.8% Tax” by the National Association of Realtors.
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