Sasquatch...the Loch Ness Monster...a 3.8% Real Estate Tax?

Sasquatch...the Loch Ness Monster...a 3.8% Real Estate Tax?

Published: Jan 25, 2013

Certain Internet rumors refuse to die and some have amazing staying power. While many are acts of deception, others seem to start by accident. "A New 3.8% Real Estate Tax" is a good example of such a case. This popular cyberspace tax misconception took off after health care reform was enacted into law more than two years ago.

Though the 3.8% tax was added into the health care law at the last minute and never considered in hearings, it will not be imposed on all real estate transactions. However, a portion of the story is true: to help support Medicare, a 3.8% tax on investment income of upper-income households will take effect in 2013 which could include a small percentage of home sales among some high-income households.

The National Association of Realtors (NAR), which does not support the tax and is not advocating for its repeal at this time, quickly released material at the time to show that the tax does not target real estate. In fact, it will affect very few home sales because it is a tax that only affects high-income households that realize a substantial gain on an asset sale, including on a home sale, once other factors are taken into account. It is estimated that 2 percent of home sellers may be affected.

Many different pieces must fall into place a certain way for the tax to even apply.

  • First, it would still apply only to individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI.

  • Second, any home sale gain (of one's principal residence) must be more than the $250,000-$500,000 capital gains exclusion of primary residences that's in effect.

Again, that is gain, not sales amount. The number of home sellers impacted by this 3.8% tax would be minimal and only the amount above the exclusion would be factored into its calculation.

Capital Gain Example from the NAR: Sale of a Principal Residence

John and Mary sold their principal residence and realized a gain of $525,000. They have $325,000 Adjusted Gross Income (before adding taxable gain).

The tax applies as follows:

AGI Before Taxable Gain

$  325,000

Gain on Sale of Residence

$  525,000

Taxable Gain Added to AGI  ($525,000-$500,000)

$    25,000

New AGI  ($325,000 + $25,000)

$  350,000

Excess of AGI over $250,000  ($350,000 - $250,000)

$  100,000

Lesser Amount Taxable

$    25,000

Tax Due  ($25,000 x 0.038)

$         950









Note: If John and Mary had a gain of less than $500,000 on the sale of their residence, none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax could depend on the other components of their $325,000 AGI.

Of course, it is important that each individual determine their own financial impact with the personal tax advisor. A tax professional is in the best position to say if the tax is applicable. Examples cited here are only to help you get a sense of how the tax works. Likewise, please note that this potential capital gain tax ramification would occur in 2014 because the tax filer does the calculation in 2014 for the 2013 tax year when the legislation goes into effect.

As usual, NEI will keep you updated as any additional information becomes available -- but we'll politely leave Sasquatch or Loch Ness rumors to someone else.