Here is the Top Ten Things You Need to know about the New
3.8% Real Estate Sales Tax
When you add up all of your income from every possible
source, and that total is less than $200,000 ($250,000 on a joint tax return),
you will NOT be subject to this tax.
The 3.8% tax will NEVER be collected as a transfer tax on
real estate of any type, so you’ll NEVER pay this tax at the time that you
purchase a home or other investment property.
You’ll NEVER pay this tax at settlement when you sell your
home or investment property. Any capital gain you realize at settlement is just
one component of that year’s gross income.
If you sell your principal residence, you will still receive
the full benefit of the $250,000 (single tax return)/$500,000 (married filing
joint tax return) exclusion on the sale of that home.
If your capital gain is greater than these amounts, then you
will include any gain above these amounts as income on your Form 1040 tax
return.
Even then, if your total income (including this taxable
portion of gain on your residence) is less than the $200,000/$250,000 amounts,
you will NOT pay this tax.
If your total income is more than these amounts, a formula
will protect some portion of your investment.
The tax applies to other types of investment income, not
just real estate. If your income is more than the $200,000/$250,000 amount,
then the tax formula will be applied to capital gains, interest income,
dividend income and net rents (i.e., rents after expenses).
The tax goes into effect in 2013. If you have investment
income in 2013, you won’t pay the 3.8% tax until you file your 2013 Form 1040
tax return in 2014. The 3.8% tax for any later year will be paid in the
following calendar year when the tax returns are filed.
In any particular year, if you have NO income from capital
gains, rents, interest or dividends, you’ll NEVER pay this tax, even if you
have millions of dollars of other types of income.
The formula that determines the amount of 3.8% tax due will
ALWAYS protect $200,000 ($250,000 on a joint return) of your income from any
burden of the 3.8% tax. For example, if you are single and have a total of
$201,000 income, the 3.8% tax would NEVER be imposed on more than $1000.
It is true investment income from rents on an investment
property could be subject to the 3.8% tax. BUT: The only rental income that
would be included in your gross income and therefore possibly subject to the
tax is net rental income: gross rents minus expenses like depreciation,
interest, property tax, maintenance and utilities.
The tax was enacted along with the health care legislation
in 2010. It was added to the package just hours before the final vote and
without review. NAR strongly opposed the tax at the time, and remains hopeful
that it will not go into effect. The tax will no doubt be debated during the
upcoming tax reform debates in 2013.
