Regarding your question, the email is thankfully completely false and there is no 3.8% national sales tax on all real estate transactions. I have included information below to REALTORS® with questions on this tax provision.
Please forward this to all of your friends and colleagues to help combat the misinformation. Please let me know if you have any questions after you have reviewed the information. Thanks.
There was a 3.8% tax on certain income contained in the health care reform legislation that will affect real estate transactions only in extremely remote situations. Most emails circulating around the internet stipulate that this 3.8% tax will apply to all real estate transactions, which is false and misleading. The tax will only apply in situations where the sale produces income in excess of the $250,000 or $500,000 capital gains cap and the seller has an adjusted gross income of more than $250,000. Under an analysis by the Tax Foundation, the new tax will affect something less than 2% of families beginning in 2013.
Basically, any income derived from the sale of a principal residence (only owner-occupied property) is not considered income by the Internal Revenue Service (IRS) unless the amount of profit from the sale exceeds $250,000 for individuals and $500,000 for married couples. If an individual or married couple has income from a home sale that exceeds this capital gains threshold, then they currently have to pay taxes on the amount of that income exceeding the capital gains threshold. This is current law and is not affected by the health care reform legislation.
Under the language in the health care reform legislation, an additional 3.8% tax is levied on the amount of an individual’s income that exceeds $200,000 per year (or $250,000 for couples filing jointly). This new tax applies not only to income derived from real estate, but all other forms of compensation including other asset sales and salaries. This is primarily an income tax and only affects real estate transactions to the extent that any income is realized from the sale in excess of the capital gains tax exclusions.
Accordingly, if an individual has more than $250,000 (or $500,000 for a married couple) in profit (the take home once all liens are paid off and costs are paid, including the mortgage payoff) coming from a home sale and they make more than $200,000 per year (or $250,000 for couples filing jointly) in adjusted gross income, they would need to pay an additional 3.8% tax on the profit realized from the sale of that home. Even then, the tax will only fall on that portion of the profit from the home sale that exceeds the capital gains limit and the income limit of $200,000 for individuals and $250,000 for couples.
Vice President of Governmental Affairs
Kansas Association of REALTORS®
3644 SW Burlingame Rd.
Topeka, KS 66611
785-267-3610 Ext. 2133 (Office)