You may have heard rumors of a 3.8% tax on home sales. Shortly after the tax was approved, misleading documents went viral online and caused a great deal of misunderstanding. It is true that a new 3.8% real estate tax is on the horizon, but it applies only to a limited group of taxpayers.
Given my background as a real estate broker, I wanted to take the opportunity to clear up some confusion over this news.
Beginning January 1, 2013, a new 3.8% tax on some investment income will take effect. This new tax is included in The Health Care and Education Reconciliation Act (commonly known as Obamacare) passed by Congress in 2010. It is expected to generate $210 billion (over 10 years) to fund health care reform. The revenues generated from this tax will be allocated to the Medicare Trust Fund that is part of the Social Security System.
This tax applies to investment income including capital gains, interest, dividends, annuities, royalties and rent. The tax will apply to individuals with an adjusted gross income (AGI) greater than $200,000 and couples filing a joint return with more than $250,000 AGI.
What does this mean for Hoosiers? This tax does not affect all real estate transactions. It only applies to net investment income. It is not a tax on the selling price of the home. It is rather, a tax on the profit.
Furthermore, for a principal residence (the one a homeowner lives in), only the amount of profit that exceeds $250,000 (or $500,000 in the case of a couple) will be taxed. For example, a couple that makes a profit of $525,000 selling their primary residence would owe $950 or 3.8 percent of the amount of profit over $500,000.
Make no mistake about it, this is a new tax. Since the tax does not begin until 2013, I suggest you utilize this window of opportunity to analyze your investments and plan your strategy to lessen the impact of the new tax. I recommend you contact a tax professional for the most detailed explanation.