Does the Health Care Bill Include a New 3.8% “Sales Tax” on Real Estate Sales?
There is a buzz throughout various social media outlets that with the passage of HR 3200, The Health Care and Education Affordability Reconciliation Act of 2010 (the “Health Care Bill”), taxpayers will be paying a 3.8% sales tax when they sell real estate.
This is not exactly true. If you dig a little deeper, you’ll find that there is a 3.8% tax which has been put into place through the Health Care Bill; this is not a sales tax, but rather a Medicare tax. This tax will be put into place starting in 2013 and it will only apply under certain circumstances.
First, the tax only applies to “high-earners” as spelled out in the bill. This includes married couples filing jointly making over $250,000, $125,000 for couples filing separately, and $200,000 for all others.
Next, this tax is only applied to certain income, including gain from the sale of real estate. For example, if you purchased a property for $200,000 and sell it for $250,000, the tax would be applied to the $50,000 profit, not the sales price of $250,000.
Finally, if the property is your primary residence, Section 121 of the IRS Code may apply. Under this code section, taxpayers who have owned and lived in a property for 2 of the last 5 years may be able to exclude from tax up to $250,000 of the gain if they are single and $500,000 if they are married. Using the example above, if the $50,000 profit falls within the requirements under Section 121, this $50,000 would be tax free. If this property was not your primary residence or otherwise did not fall within the guidelines of Section 121, then the 3.8% tax would apply.
This tax is certainly something to keep an eye on for everyone in the real estate industry. As you prepare for your future real estate transactions, consult with a tax professional to get specifics on whether this tax will apply to you or your client and if so, what the tax liability may be.