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Clarification On The New Real Estate Surtax

Posted by Greg Moser on December 4, 2012
| 33 Comments

Clarification On The New Real Estate Surtax –  

When the Supreme Court upheld the healthcare reform law on federal tax grounds, it re-stoked a housing issue that had been relatively quiet for the last year: The alleged 3.8% “real estate tax” on home sales beginning in 2013 that is buried in the legislation.

Immediately following enactment of the healthcare law, waves of emails hit the Internet with ominous messages aimed at homeowners.  “Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it”? . . “When did this happen?” It’s in the healthcare (Obamacare) bill, just thought you should know.

 

Once litigation challenging the law’s constitutionality surfaced in federal courts, the email warnings subsided. But with the law scheduled to take effect, questions are being raised again – “Is there really a 3.8% transfer tax on real estate coming in 2013?”.  “Does it preempt the existing $250,000 & $500,000 capital gains exclusions for single-filing and joint-filing home sellers, as some emails have claimed?”

In case you’ve heard rumors or received worrisome emails about any of this, here’s a quick primer.

Yes, there is a new 3.8% surtax that takes effect Jan. 1, 2013 on certain investment income of upper-income individuals – including some of their real estate transactions. But it’s not a transfer tax and not likely to affect the vast majority of homeowners who sell their primary residences next year.

In fact, unless you have an adjusted gross income of more than $200,000 as a single-filing taxpayer, or $250,000 for couples filing jointly ($125,000 if you’re married filing singly), you probably won’t be touched by the surtax at all, though you could be affected by other changes in the code if Congress doesn’t extend the Bush tax cuts scheduled to expire at the end of this year.  We’ll have to see how that plays out with only 27 days left until we go “Thelma and Louise” . . .

Let’s say you have income greater than these thresholds, you might not be hit with the 3.8% tax unless you have certain investment income targeted by the law. These are specifically dividends, interest, net capital gains and net rental income. If your income is solely “earned” – salary and other compensation derived from active participation in a business – you have nothing to worry about as far as the new surtax.

Where things can get a little complicated, however, is when you sell your home for a substantial profit, and your adjusted gross income for the year exceeds the $200,000 or $250,000 thresholds. The good news (If there is any) is that the surtax does not interfere with the current tax-free exclusions on the first $500,000 (joint filers) or $250,000 (single filers) of gain you make on the sale of your principal residence.  However, any profits above those limits are subject to federal capital gains taxation and, may also expose you to the new 3.8% surtax – OUCH !

More now than ever, it will be important that you to pull together documentation on the capital improvements you made to the property and expenses connected with your home. These items include but are not limited to such things as – closing costs for a refinance (within that tax year). These include any and all Title Escrow, Lender, Broker/Agent fee’s, Appraisal, pre-paid points, etc. These items increase your tax “basis” in order to lower your capital gains. And of course any of the usual home improvement costs that you can show will also be included for that year.

 

The last thing you want to do is sell your home only to find out that you have an additional 3.8% due upon sale.

 

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