Effective Jan. 1, a new federal levy on certain real estate transactions will cost some homeowners thousands
Area residents looking to buy or sell a home should note that beginning Jan. 1, 2013, a new 3.8 percent federal tax applies to certain real estate transactions.
Enacted by Congress in 2010 to help fund the Obamacare initiative, the tax is expected to generate $210 billion over the next 10 years and cost some home buyers and sellers thousands of dollars.
Struggling to find money to pay for President Obama’s massive health care legislation, Congress adopted the tax in eleventh-hour negotiations. The tax was quietly slipped into the bill, and not discussed or reviewed until hours before final debate on the health care legislation began.
The National Association of Realtors (NAR), which unsuccessfully lobbied against the tax, calls it a “complicated” provision that will affect individual buyers and sellers in unpredictable ways. To help realtors and their clients understand the potential effects of the tax, the association has published a series of fact sheets and case studies on its website (www.REALTOR.org/healthreform).
Many people aware of the tax mistakenly believe it applies to all real estate transactions. In reality, the tax applies only to some income derived from interest, dividends, rental income (less expenses) and capital gains (less capital losses). Also, the tax falls only on individuals with an adjusted gross income above $200,000 and couples filing a joint return with more than $250,000 in adjusted gross income.
So what do these provisions mean in practice? Consider three common real estate scenarios provided by the NAR on its website.
Ex. 1: Capital Gains on the Sale of a Principal Residence
A married couple sells their principal residence and realizes a gain of $525,000. They have $325,000 adjusted gross income before adding the taxable gain.
AGI Before Taxable Gain
$325,000
Gain on Sale of Residence
$525,000
Taxable Gain
$25,000
($525,000 - $500,000)
New AGI
$350,000
($325,000 + $25,000)
Excess of AGI Over $250,000
$100,000
($350,000 - $250,000)
Lesser Amount (Taxable)
$25,000
(Taxable Gain)
TAX DUE
$950
($25,000 x 0.038)
Ex. 2: Sale of a Second Home With No More Than 14 Days Rental Use
A family owns a vacation home they bought for $275,000. They have never rented it to others. They sell it for $335,000. In the year they sell it, they also have earned income from other sources of $225,000.
Gain on Sale of Vacation Home
$60,000
($335,000 - $275,000)
Income from Other Sources
$225,000
New AGI
$285,000
($60,000 + $225,000)
Excess of AGI Over $250,000
$35,000
($285,000 - $250,000)
Capital Gain
$60,000
Lesser Amount (Taxable)
$35,000
(AGI Excess)
TAX DUE
$1,330
($35,000 x 0.038)
Ex. 3: Rental Income Sources Including Real Estate Investment Income
A man has a full-time job earning $85,000 per year. He also owns several rental units and receives gross rental income of $130,000 per year. He has $110,000 in expenses related to the rental income.
AGI Before Rents
$85,000
Gross Rents
$130,000
Rental Property Expenses
$110,000
Net Rents
$20,000
($130,000 - $110,000)
New AGI
$105,000
($85,000 + Net Rents)
Excess of AGI Over $200,000
$0
Lesser Amount (Taxable)
$0
TAX DUE
$0
The NAR on its website provides several more examples of how the new tax will apply to certain real estate transactions. For more guidance on how the tax might apply to your own situation, contact your accountant or certified tax professional.
Jerry Kline is a Realtor with the Odenton, Md., office of Keller Williams Flagship Realty (1216 Annapolis Rd., Odenton.) For more information on the local real estate market, contact him at (443) 924-7418.
