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The new 3.8% “real estate” tax explained

by Rob Regan on November 29, 2012

It is true that a last minute tax was snuck into Obama’s healthcare law to “pay for” it. What isn’t true is that this is an across the board 3.8% tax on all real estate sales. In fact it isn’t even close to that.

The tax is complicated, but it boils down to three main things.
1. You are exempt if your Adjusted Gross Income is below $200,000 as a single filer, and $250,000 if married. In other words, 96% of the country is exempt from this new tax (your rich uncle can complain, but you can tell your poor one to just shut up 🙂

2. As an individual selling your primary residence this new law does NOT apply to the first $250,000 in profit on your sale, and if you’re married it doesn’t apply to the first $500,000 in profit. So you’ve got to have an ENORMOUS gain from the sale of your primary residence for this to effect you in any meaningful way. For example, if your profit is $1M and you qualify for the first $500k tax free as a married couple, the next $500k in gains results in a $19,000 tax from the new healthcare law. (I’m not addressing other taxes in this article – the $19,000 is purely from this new 3.8% tax).

3. The 3.8% tax appears to be on any capital gains, not just real estate. So let’s stop calling it a “real estate tax”. But, since the principal residence tax break doesn’t apply to investment properties or vacation homes, this is where you really will get hit with a new tax if you earn more than $200,000/$250,000 in the tax year you’re worried about (2013 is the first year it applies, so this is your 2014 filing). If you do earn above those levels, the lesser amount of the capital gains vs. your AGI over these levels is the portion that gets hit by the new 3.8% tax. That sounds confusing even to me, so for more on how this tax works here is another explanation with 7 example situations http://www.ksefocus.com/billdatabase/clientfiles/172/8/1437.pdf

Keep in mind, it does not matter how much you sell your home for – it only matters how much you profited from the sale. So if you’re selling the $10 million home you bought for $9.5 million, and you’re married and have lived there for 2 of the past 5 years as your primary residence, you can relax. You may have bought it for all cash and are therefore pocketing $10 million (less sales expenses) but the IRS doesn’t care about the new cash injection into your checking account unless it is profit.

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