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.