Wednesday July 23rd 2014

Stalk Us!

Federal sales tax on homes to pay for health care? Not exactly.

Here at MAR we have received dozens of calls and emails from members that start off like this:

“I read on the Internet that a provision in the new federal health care law will put a new 3.8% sales tax on the sale of all homes.  Is that true?”

No.  It is not true.

An email has been circulating for months (and you may have even received it), but again it is false.  In fact the National Association of REALTORS® (NAR) has received so many inquiries on this subject that they have posted a “myth busters” document on realtors.org about it.

Some of the emails include reference to an op-ed piece that ran in a March 2010 edition of the Spokane, Washington, Spokesman-Review that FALSELY reported that the health care bill contained a provision for a 3.8% “sales tax” or “transfer tax” on the sale of all homes.

What did the bill include?
The health care bill included a provision that imposes a new 3.8 percent Medicare tax for some high-income households that have “net investment income.” Any revenue collected by the tax is dedicated to the Medicare hospital insurance program.  This new tax applies only to households with Adjusted Gross Income (AGI) of more than $200,000 for individuals or more than $250,000 for married couples.

Because capital gains are included in the definition of net investment income, an additional tax obligation might result from the sale of real property.  Even if the AGI limits are met, the new tax would not be applied to capital gains that result from the sale of a home, because the existing home sale capital gains exclusion rule still applies – $250,000 (individual)/$500,000 (couple). So if the gain from the sale of the primary residence is below that amount, then NO Medicare tax will have to be paid on the gain.

The new Medicare tax would apply only to a home sale gain realized in excess of the $250K/$500K that pushes the filer’s AGI over the $200K/$250K income limits. (Reported by the National Association of REALTORS®)

Some other quick points:
• The new Medicare tax will take effect January 1, 2013.
• The legislation makes no changes to the mortgage interest deduction.

Factcheck.org
As you probably know, MAR is opposed to transfer taxes, but here’s what Factcheck.org (a non-partisan project of the Annenberg Public Policy Center of the University of Pennsylvania) had to say about this claim:

“No, with very few exceptions the first $250,000 in profit from the sale of a personal residence won’t be taxed, or the first $500,000 in the case of a married couple. The tax falls on relatively few — those with high incomes from other sources.”

Click here to read the complete Factcheck.org explanation.

Reader Feedback

6 Responses to “Federal sales tax on homes to pay for health care? Not exactly.”

  1. Jeff says:

    Isn’t the capitol gains tax law due to expire in 2010? I have heard that the existing home sale capital gains exclusion rule is on the chopping block as well. If that happens doesn’t that result in a transfer tax on the sale of virtually all homes?

    • eberman says:

      Jeff,

      This is how our legal staff sees this right now. However, here is the required disclaimer first:

      This information does not constitute the practice of law nor does it attempt to provide legal advice concerning any specific factual situation. Consult with your tax professional or attorney for specific advice.

      The capital gains tax law is NOT set to expire; however, the temporary rate decreases will sunset and go back up to pre-2003 levels (long-term will jump, generally, from 15% to 20%); short-term, generally 3% increase).

      $250,000/$500,000 exclusion amounts are not set to change, and we are not aware of any bona fide intent to reduce or strike them. Thus, 2011 Cap Gains will likely be subject to the same rules and exclusions, but subject to higher rates, ranging from 3% – 5% increases with a few exceptions.

      Hypothetically, if the exclusions were stricken, then more home sales may generate a tax. But, it is not a transfer tax. It is a tax on income that may exceed certain high thresholds as a result of a substantial capital gain (e.g., from the sale of a house). Still, even if the Cap Gains exclusions are stricken, and all else remains the same, including the current Adjusted Gross Income (AGI) thresholds, very few would be affected. Keep in mind that the Capital Gain on the sale of any asset, including a house, is not the selling price; it is the selling price minus the amount the taxpayer paid for the house, along with certain improvements.

  2. Burt Endsley says:

    In the last paragraph above you state that the Capital Gain “… is the selling price minus the amount the taxpayer paid for the house along with certain improvements.”

    However, I believe that if a home is held in a trust, after the death of a trustee the taxable basis of the house increases tax free to the market value of the house on the date of that trustee’s death. Thus the only Capital Gain to be considered, when the house is eventually sold, would seem to be the net sales price less this revised basis. Thus the amount the taxpayer paid for the house is no longer pertinent.

    If the above is correct, any possibility of a Medicare tax would be even further reduced. Do you agree?

    • eberman says:

      Hello Burt,

      Thank you for identifying this rather fine detail about capital gains law. However, before I can pass you on the answer from our legal staff, I need to post this disclaimer:

      Keep in mind the answer below does not constitute the practice of law nor does it attempt to provide legal advice concerning any specific factual situation. Consult with your tax professional or attorney for specific advice.

      Now that we’ve got that out of the way…

      Yes, Federal tax Law does provide for a “Step-Up” in basis upon transfer from a decedent’s estate to the beneficiary. Basis is generally measured by price paid for the property + cost of capital improvements. Basis can be “adjusted,” however. And the distribution from estate to beneficiary is a situation where this basis adjustment…a “Step-Up,” to be specific…can happen. So, when the beneficiary turns around and sells that property, the capital gain, if any, will generally be measured by the sales price minus the ADJUSTED BASIS, which will be the fair market value of the property on the day the legatee died.

      Next question: Will this reduce Medicare tax liability? Answer: If there was any liability to begin with, and the Step-Up in basis did, in fact, reduce capital gain liability, then, YES, the Medicare tax will be reduced…or eliminated.

  3. John Markham says:

    Your statement, “It is not true.” regarding whether or not there will be a Federal Tax to pay for health carer is false. It is quite clear from your own explantion that there will be a federal tax on the sale on homes under certain circumstances. You clearly state that the tax “would apply” – unless of cousre you do not consider taxes paid by high income individuals to be taxes.

    • eberman says:

      John,

      Thanks for your comment. The question of whether there is a federal tax to pay for health care (which begins in 2013 and will be filed in 2014 by tax payers) was never disputed. However, to say it is a sales tax on the sale of a home is a gross misrepresentation. It is not a sales tax, but rather an income tax issue.

      First, the disclaimer: This does not constitute legal advice and if you have questions about your own situation you should consult an attorney or a tax professional.

      Here are the facts in brief:

      • Yes, a new tax was created in the Health Care Law. But it is NOT a Sales/Transfer Tax on Real Estate Sales.

      • What is it, then? It is a 3.8% Tax on certain “investment” income, which does include Capital Gains from the sale of Real Estate, including the sale of a principal residence.

      • It only affects people w/ Adjusted Gross Incomes over $200K (single) or $250K (married filing jointly)

      • For Sale of a Principal Residence: The first $250K (single) or $500K (married) of Net Capital Gain (sales price minus original purchase price + improvement costs) are NOT COUNTED. Those Gains are excluded from income altogether and are thus not affected at all by the new 3.8% Medicare (not Medicaid) Tax.

      • Even for a non-principal residence, the taxable Capital Gain (net profit) from the sale of a vacation home would still have to put a married couple’s Adjusted Gross Income over $250K for the year for them to pay a penny of the new tax.

      Examples:
      The Johnsons (empty nesters) sell their primary home for $800,000. Unless they bought the house for less than $300,000 and made no capital improvements, they pay nothing. That $500,000 of Gain is completely excluded.
      If they bought it for $250,000, there would be a $50,000 taxable Capital Gain ($550,000 total gain minus $500,000 exclusion). That $50,000 is Income. BUT, if they jointly earned no more than $200,000 that year in addition to that $50K, then their AGI is still at or below $250,000. Thus, no 3.8% tax.
      If they sold a vaction home for $500,000, for which they had paid $300,000. They have $200,000 in Capital Gain. They could still earn up to another $50,000 (salaries, etc.) that year and still not be hit by the 3.8% Medicare Tax.

      In Summary:
      Best way to summarize this tax is as an additional 3.8% Income Tax on Capital Gains/Investment Income that push a taxpayer’s annual income (starting in year 2013) over:
      • $200,000 (single)
      • $250,000 (married)
      … and keeping in mind the fact that the first $250K/$500K of Gain on Sale of Primary Residence is COMPLETELY EXCLUDED.
      Note: Sources project that the new tax should only hit 2% of top earners. Even among those who do pay the 3.8% surtax on some of their income, it will not necessarily result from a Real Estate sale.
      It is possible that much of the 3.8% tax will be paid as a result of estate sales (triggered by executors converting assets to cash for division & distribution).

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