Q: I recently received an e-mail stating, “Did you know that if you sell your house after 2012 you will pay a 3.8 percent sales tax on it.” Is this true? — Neil S., Las Vegas
A: This is not true.
The e-mail you included with your question, which is similar to messages many of us have been receiving since this spring, state: “Did you know that if you sell your house after 2012 you will pay a 3.8 percent sales tax on it? That’s $3,800 on a $100,000 home. When did this happen? It’s in the health care bill. Just thought you should know …”
Like many of these chain e-mails, it starts with a nugget of truth and distorts the issue with misinformation. Perhaps because of its political nature during this heated election season, this one attracted more attention than most.
In fact, the National Association of Realtors has been trying to dispel this myth since at least May. In a letter to members as part of its Myth Busters’ series, NAR debunked this claim that a federal health care bill contains a nearly 4 percent “transfer tax” on home sales.
According to NAR, an opinion piece earlier this year in the Spokane, Wash., Spokesman-Review newspaper apparently sparked this rumor by incorrectly reporting that the federal health care bill contained a 4 percent sales tax or transfer tax on the sale of a home. Soon after, the Portland Oregonian newspaper helped set the record straight by publishing a piece pointing out this error.
So, here’s the scoop: The health bill passed this year by Congress 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.
It’s important to note that this new tax applies only to households with adjusted gross income of more than $200,000 for individuals, or more than $250,000 for married couples. Since capital gains are included in the definition of net investment income, an additional tax obligation might result from the sale of real property, under limited scenarios impacting a small percentage of the population.
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, since the existing home sale capital gains exclusion rule still applies (with income limits of up to $250,000 for an individual or $500,000 for a couple).
So if the gain from the sale of your 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 $250,000/$500,000 threshold that pushes the taxpayer’s AGI over these income limits.
Since few sellers are able to show that kind of profit on the sale of home in today’s market, such instances will likely be rare.
Two more points to consider here. First, the new Medicare tax isn’t scheduled to take effect until Jan. 1, 2013. Secondly, the Legislation makes no changes to the mortgage interest deduction.
John J. DiBiase, government affairs communications director for NAR, summarized it by saying, “The myth we are dispelling is that there is a 3.8 percent transfer tax on all real estate transactions.” Again, this is just not the case.
Consider this scenario provided by NAR: Hypothetical homeowners sold their principal residence and realized a gain of $525,000. They have $325,000 adjusted gross income (before adding taxable gain). This tax would apply 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 ($325,000 plus $25,000 taxable gain)
Excess of AGI over $250,000: $100,000 ($350,000 – $250,000)
Lesser amount: (Taxable) $25,000 (Taxable gain)
Tax due: $950 ($25,000 x 0.038)
Note that if owners 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 percent tax. Whether they paid the tax would depend on the other components of their AGI.
I know the details can get confusing. For more information on this issue, consult a qualified local Realtor or visit http:/blog.lasvegasrealtor.com.
Rick Shelton is the president of the Greater Las Vegas Association of Realtors and has worked in the real estate industry for 20 years. GLVAR has 12,500 members. To ask him a question, e-mail him at email@example.com. For more information, visit lasvegasrealtor.com. Questions may be edited for space and clarity.