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The Claim: Healthcare Law Will Create a 3.8% Real Estate Tax in 2013

Earlier this year, a number of similar, frequently-forwarded emails frightened a lot of people. Here’s a snippet of one:

This should help stimulate the Real Estate market!

UNDER THE NEW HEALTH CARE BILL – DID YOU KNOW THAT ALL REAL ESTATE TRANSACTIONS ARE SUBJECT TO A 3.8% “SALES TAX”?

YOU CAN THANK NANCY, HARRY & BARACK (AND YOUR LOCAL CONGRESSMAN) FOR THIS ONE. IF YOU SELL YOUR $400,000 HOME, THIS WILL BE A $15,200 TAX.

Now that the healthcare bill has become law, do we need to worry about increased real estate taxes? After all, a 3.8% tax on a $300k home would be $11,140; the sale of a $750k home would be taxed $28,500!

The reality is that the Patient Protection and Affordable Care Act does require a 3.8% real estate tax on some home sales starting in 2013.

But don’t get upset just yet.

According to the non-partisan, consumer advocacy group FactCheck.org, middle-class Americans will not pay additional taxes on the sale of their homes. The 3.8% taxation requirement only applies to individuals who have an annual income of $200k or more, or couples who have an annual combined income of $250k or greater.

Another important fact to note is that the 3.8% taxation will not apply to the entire sale of a person’s home. It only applies to any capital gains greater than $250k for individuals or $500k for couples.

Therefore, if a single woman sold a $210k home, or a married couple with an annual income of $300k sold their $450k house, neither would face any additional taxes. While the 3.8% tax on the sale of homes will affect some people, it won’t be as bad as it seems.

For example, if a couple who has an annual income over $250k sell their home (which they originally purchased for $350k) for $900k they’ve made a profit of $550k. This couple would have to pay an additional 3.8% tax on $50,000 (i.e., the $550k profit minus the $500k capital gain threshold), for a total of $1,900.

One way to reduce the amount of capital gain on a home sale (therefore reducing the likelihood of having to pay the extra tax) is to calculate the cost of all capital improvements you’ve made while living in the home. Capital improvements include any major changes you’ve made which add value to your home. These may include major remodeling, reroofing, rewiring, or the addition of air conditioning, for example.

Maintenance performed to keep the home in good condition, such as painting or replacing carpeting, do not qualify as capital improvements. When calculating profits from your home sale, add the price you paid to purchase the home to the amount spent on capital improvements. This combined figure is subtracted from the sale price to determine your capital gain

If the sale of your home still exceeds the capital gain threshold, you may want to sell your home before 2013, when the tax takes effect.

Another option would be to consider seller-financing, where the seller carries back a note on the sale of their own house. Essentially, the seller would receive monthly mortgage payments from the buyer instead of receiving a large lump sum when the house is sold. However, homeowners can only carry back a note on their own home once every three years, according to the Department of Housing and Urban Development’s Safe Mortgage Licensing Act, which is expected to become a law by the end of 2010.

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.

Comments

  1. Sarah, hate to tell you, but Fact Check.org is NOT “non-partisan” they are shills for the radical left.

  2. Gary is absolutely right. FactCheck.org is a farce. If you want the facts, don’t consult FactCheck.org! They are an arm of The Annenburg Foundation, which Obama, Bill Ayers, The Weather Underground (no, not the weather web site), et. al. are wrapped up in. Don’t be gullible people.

  3. LOL. Sarah, your link references NAR which references FactCheck.org as their source. Even if FactCheck.org is correct, the bottom line is that a TAX IS A TAX IS A TAX. Just saying that the tax only applies at specific incomes or capital gains levels, doesn’t make it less of a TAX. This is how liberals spread their own misinformation about purported “misinformation”. Quite the trick! Unfortunately, there are still people drinking the kool-aid propagandized by the Obama administration and their sycophants.

  4. Wow. Some people are very into their sides. I never stated it was not a tax. Its definitely a tax and something to be aware of. Its not great – do I want an extra tax on housing? As a Realtor and real estate investor I can firmly say no. But I also think its funny how one tax on high income individuals is the absolute end of the world to some people. So don’t sell a house then, rent… Problem solved
    :)

  5. Sarah, no, it’s just that most of us (a majority of Americans) are against this disaster of a bill that was rammed through without any regard for the views of the majority. This is one of the many examples of how this pile of crap bill is going to be financed. What I don’t understand (I don’t find it “funny” as you do), is why so many people feel higher income individuals deserve to be taxed even more. They already pay the majority of the taxes. You say this is “one tax” on them. You’re right. It’s one of many taxes on them. How much tax is enough? Your attitude is typical; as long as the tax doesn’t affect me, it’s fine!

  6. How do you know it doesn’t affect me? Have you seen my income tax return? You know what happens when you ASSUME don’t you? :)

    Let’s agree that added taxation is a bummer and leave it at that. You can get the information from whatever sources you prefer.

  7. No assumptions made by me. But, it sounds like you ASSUMEd “me” meant “you”. :) I was referring to the attitude of “you don’t have to worry if you are not that higher tax bracket” attitude.

    We agree! ;-)

  8. “So don’t sell a house then, rent… Problem solved”

    Sarah, I believe that might be one of the reasons people are so against the tax — discouraging people from buying homes isn’t exactly a good economic move in our current economic situation.

    That said, the rich already pay the lions share of everything the government does, which seems a basic violation of “equal protection of the laws”, and ironically hurts the poor more than anyone.

    Thanks!
    Shaun

  9. Wow! Naivety aside, taxes are just a reality. For those of you who have never left the country, we do a pretty good job of utilizing our taxes but we could always do better. Does anyone remember that Ronald Reagan raised taxes 6 times in his 8 years as President? Please take it from an over 50 businessman who feels priviled enough to have owned several houses and paid every tax required, if this tax bothers you —rent. Sarah and Shaun are exactly right.

  10. I understand that point of view Shaun. And I hope that my joke didn’t come off as a calling for people to stop by houses if they can afford to do so, more of a joke, albeit an option for those who are extremely opposed to the new law.
    It is sad that it’s discouraging, I certianly don’t like extra taxes, but I agree with Chuck too in the sense that you make do and do your best regardless. Thanks Chuck for the important insight.

  11. David J Stevenson says:

    Sarah, your explanation was much better then….and thanks
    http://www.spokesman.com/stories/2010/apr/03/home-sales-tax-clarified/
    BUT: I have just 2 things to say:
    They say it’s a Medicare tax and not a sales tax…WHAT’S THE DIFFERENCE!
    Medicare is a selling product !!
    In my book that’s a sales tax..
    More importantly, so what is a sales tax of any kind doing in Health Legislation any how!!
    Also, one last point. It’s been stated that this is a very complicated piece of legislation. Well, the American taxpayer should NOT have to try to decipher laws…remember, ignorance of the law is no excuse..how can we NOT be ignorant when we can’t even decipher them !!

  12. taxes aside.i wanted a president born in usa….where is he from again? gosh if you know then you got all the inside skinny the rest of the world wants. lol

  13. Jacob Theodore says:

    There is a fiction that has been told and retold until people believe it. That fiction is that houses become more valuable. They do not. Existing home prices, like gold prices, simply track inflation. Unless one makes actual capital improvements, a maintained home merely holds its value against inflation. If I sold my house for $500,000 and bought an equivalent house around the corner, I would have to pay the same $500,000. House and gold prices serve only to tell us how much our money has been devalued.