The Truth About the New 3.8% Tax on Real Estate

On January 1, 2013 a brand new tax on certain investment income will take effect. The purpose of this new tax is to generate an estimated $210 billion dollars to help fund President Obama’s Health Care and Medicare reform (aka ObamaCare). Understand that this tax WILL NOT be imposed on all real estate transactions, a common misconception. Rather, when the legislation becomes effective in 2013, it may impose a 3.8% tax on some (but not all) income from interest, dividends, rents (less expenses) and capital gains (less capital losses).

This tax will affect investment real estate far more than it will affect owners and the sale of their primary residence. Remember that the IRS will continue to allow gain of $250,000/$500,000 to be excluded on the sale of a primary residence. The 3.8% ObamaCare tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI.

Here is an example of the tax in action:

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)                     $25,000
New AGI                                                     $350,000
Excess of AGI over $250,000                   $100,000
Lesser Amount (Taxable Gain)                 $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 would depend on the other components of their $325,000 AGI.

*Courtesy of the National Association of Realtors

If you have any more questions about this new tax feel free to email me at: dave@realtycolorado.com

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About dherries
Dave and Sally Herries and The RealtyColorado Team - Real Estate Broker serving the metro-Denver area. Offering properties in urban, sub-urban and rural areas. Our mission statement is "Enriching lives through real estate."

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