Facts About The 3.8 Percent Health Care Tax - And What It Means For Real Estate

There has been a lot of misinformation out there about a new 3.8 percent tax that could impact real estate sales. It's important for potential home sellers to know the facts rather than the fiction they may read on the Internet as they decide whether or not to sell their home.

As a result, we're passing along some very important information from trusted sources like the National Association of Realtors that hopefully will clear up any confusion.

Most importantly, there is NO 3.8 percent "real estate sales tax" or transfer tax. However, beginning January 1, 2013, a new 3.8 percent tax on some investment income for some high-income taxpayers will take effect.

Since this new tax, which is part of the 2010 health care legislation, will affect some real estate transactions, it's crucial for both Realtors and their clients to clearly understand the tax and how it may or may not impact their sale decision.

It’s a complicated tax, so we won’t be able to predict how it will affect every buyer or seller. But it helps to understand the facts as explained in a recent NAR article:

• The 2010 health care act did create a new 3.8 percent Medicare tax, but it applies only to a limited group of high-income taxpayers and it's on a variety of "unearned" or investment income over certain thresholds, including the sale of real estate.
• The new tax is sometimes called a “Medicare tax” because the proceeds from the tax are to be dedicated to the Medicare Trust Fund, which is threatened to run out of money without additional revenue or cuts.
• "Single" taxpayers will be subject to the new health care tax if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return with AGI of more than $250,000 will also be subject to the new tax.
• Unearned income is the income that comes from investing capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business.
• When you add up all of your income from every possible source, and that total is less than $200,000 for an individual ($250,000 on a joint tax return), you will not be subject to the 3.8 percent Medicare tax.
• The 3.8 percent tax will never be collected as a transfer tax on real estate of any type, so you’ll never pay this tax at the time that you purchase a home or other investment property.

It's also important to understand that even if a home seller is subject to the new 3.8 tax, it will not necessarily result in additional taxes from selling a home, due to the capital gains exclusion on primary homes.

Individuals can exclude up to $250,000 in capital gains from the sale of their primary residence (or $500,000 for a married couple) as long as they have owned the home and lived in it for a minimum of two years.

If someone is subject to the tax, it would only be applied to the gains above that level if there are any.

The new 3.8 percent Medicare tax is complicated and everyone's situation is different. As always, we remind home sellers to consult their tax specialist before making any decision and to understand what's best in their situation.

Michael Talis is co-owner of TALIS Real Estate.