Have you heard grumbling in the real estate community about the alleged affect the healthcare law will have on real estate taxes?
- Yes. (70%, 217 Votes)
- No. (30%, 93 Votes)
Total Voters: 310
Rumor has it the healthcare law recently upheld by the U.S. Supreme Court will adversely affect sellers of real estate, causing them to pay a 3.8% surtax on their home sale.
There is a grain of truth to this gossip, though it will affect very few homeowners.
Effective January 1, 2013, single-filing taxpayers with an adjusted gross income (AGI) greater than $200,000 and couples filing jointly with an AGI more than $250,000 will be subject to the new 3.8% surtax on any capital gains on investment income exceeding a prescribed threshold.
If the capital gain realized on the sale exceeds the principal residence profit exclusion limit of $250,000 for single-filers and $500,000 for joint-filers, the amount exceeding the threshold will be taxed at 3.8%.[Internal Revenue Code §121]
Verdict: this surtax will affect only high-income taxpayers, and even then, only those rare few who will net a profit on the sale greater than $250,000.
first tuesday take
So who is worried, exactly? Sellers won’t be making capital gains large enough to qualify for the surtax for many, many years. Aside from the aberrant real estate Millennium Boom from the early 2000’s, home prices historically increase at the rate of inflation (about 2% per year).
Related article:
Thus, a mid-tier home purchased by a single-filing taxpayer (with an AGI greater than $200,000) for $300,000 today will be exempt from this rule until he is able to sell the property for at least $550,000. At an average appreciation rate of 2% per year, this will not occur until the 2040s.
This surtax misunderstanding is the result of mean-spirited political gossip; mostly in the form of mass e-mails (perhaps you or your clients received one?). The idea is to tell only a fraction of the story — a piece designed to instill ire — then let the speculation run rampant. Intentionally misleading information promotes paranoia and misinforms the public (particularly sellers), yet proves fruitful for those with political agendas. Agents must know the facts — all of them, not a sound-bite fraction—in order to combat deceit and keep their anxious sellers informed.
Let’s set the propaganda straight: this new surtax will affect very few homeowners. However, it does not mean that none will be affected. High-income sellers may wish to seek professional tax advice beyond the casually forwarded e-mail, especially if they own multiple investment properties or vacation homes.
Related articles:
Real estate licensees and the unauthorized practice of law
Raising the bar of real estate advice
Re: Health-care law’s 3.8 percent surtax will not affect many home sellers from the Washington Post
I’m a Real Estate Broker and Financial Planner in the Bay Area. Steve B your comments started as helpful but turned bitter and out of touch of who owns real estate now. Most of the recent buyers bought homes with no money down and now have lost their home so this doesn’t affect them. This tax does effect the many millions of homeowners in their 40s and above who saved their money and bought real estate based on the past govenment’s tax incentive to buy real estate. The new government’s idea to increase taxes on those who choose to save their money instead of spending it isn’t good for the economy. Your statement that homeowers have been bleeding the state and country is incorrect. The govenment has misspent our hard earn dollars. Instead of reducing their expenses as any other business would when they are over budget, they want to increase taxes to misspend more money. Is this the what goes around comes around or is it I use a tax preparer that is out -sourced to another country and you lose your job? Or is it that my many years at the library to get my 3 degrees plus working 12 hours/day to increase my business so I can live in a wonderful place like the Bay Area be penalized by those that were too lazy or unmotivated? Is that my karma? Or should your efforts better be spent on voting out corrupt politicians and unfair laws (passed only to increase the health care companies proft statements). This is what is ruining our (yours and mine) country.
I am a CTEC registered tax preparer, besides maintaining an RE sales license. What I see coming:
@Bullmoose – The taxable capital gain that will be included on your Form 1040 will be the 100,000, and your tax will be computed using Schedule D (capital gains). The regulations for how the surtax will be computed have not been published by the IRS. If you do your own taxes, you may consider talking to a professional to get clarification of your situation.
@Jerry Irons – You are correct. We are in the foothills (Calaveras County), and I follow what is going on in the four or five counties near us (my tax clients come from all over). In most of the central valley and foothills, there will be a fairly small number of homeowners affected. For the roughest estimate, count the number of listings (or get the %age) that are more than 250K (singles) or 500K (married). Not all that many …
@Glenn Davis – The sky is falling! The sky is falling! Thousands will be affected inasmuch as they will actually have to do the paperwork to find out whether they have a taxable gain and then whether the surtax applies. A vanishingly small number of sellers (including those forclosed on) who do not live in the high-rent areas will probably not be affected. High-rent areas … depends a lot on circumstances, but read on.
@Lee Willard – You are right, if I am reading between the lines correctly. Sellers of second homes have the largest exposure because there is NO exclusion of profit for a second home. But there are strategies to get around this (as I am sure you advise your clients).
@Mark Burns and @John W. – My heart bleeds for people in this situation. This is (finally!) the price you pay for living in a high-rent district. Homeowners have been bleeding the state white on oversized mortgage and property tax deductions for decades. Now you snivel that it isn’t “fair” for you to pay tax on an “investment” that has appreciated by virtue of you sitting on your butt? Any married couple with 500K in profit on a _depreciating_ asset is really in a tough spot. Sorry if I am not sympathetic, but what goes around, comes around.
Let’s not cover just the 1 to 4 unit owner occupied homes. There are lot’s of vacation homes, rental properties, property flips, etc, that could be affected by this law. That is where the real meat of the law apparently lies, so let’s cover the really important stuff – not almost totally ignore it.
Lee Willard, EA, R E Broker
The issue of ObamaCare goes way beyond the real estate industry. This new law will permanently alter the relationship between citizen and the state. Any article downplaying this fact does a tremendous disservice to concerned Americans and America.
I am aware of scores of people, including myself, living in the North Tustin, Cowen Heights and Lemon Heights area of Orange County, who will be affected by the ObamaCare tax. There will be countless people who will be taxed in our Coastal areas also.
Thousands of California’s real estate sellers will be affected by Obama’s tax on real estate sales, including home sales! It’s wrong to misslead people into thinking thet won’t be affected.
Instead of publishing a misleading quote from a prejudice source such as the Washing Post, i suggest that you should do your journalistic duty that is to recearch the issue throughly and report the ALL the facts and let readers reach their own conclusions based on their own circumstances.
Glenn
The problem will be that when the cost of the health care bill gets in place were already from .9 trillion to 2.7 trillion and we have over a year before it is instituted and you know the costs are not going down. That 3.8% tax will go down and I mean that it will end up affecting everyone. Just take a look at all the government programs they have all been changed so much you would not know the original bill and all of them have made it easier to add people to them. Look at social security, it was for people who put into social security but now if your an alcholic or dopper you do not need to put a penny into the program just go down with doctors letter saying you are an addict or a alcholic and boom you will be getting ss checks. All government programs are full of fraud and abuse and we should not add any other programs until the government can show the citizens it can clean up all the other programs.
Living and working in the San Joaquin Valley it doesn’t appear the excess over 500k will effect very, very few sellers. Namely, those who have taxable over $250,000 and that kind of equity.
In my case, in the event I sell after 2012, I may have to pay but I really don’t have a problem with it.
We bought our home in 1970…….$16,500…….
House is right around $400…….
So you say i won’t have an excise tax……
The article is VERY confusing, especially as to whether AGI is calculated BEFORE or AFTER the capital gain on the sale of my house.
Suppose hypothetically. My wife & I have AGI that regularly is in the $120,000 range, plus/minus $5,000.
We purchased our home in 1992 for $360,000, and expect to sell it in 2013 for $960,000, a profit (capital gain) of $600,000.
Under existing law, we pay capital gains tax on $100,000, which is the excess over the $500,000 exemption/exclusion for couples filing jointly.
But would we also get stuck with an additional 3.8% surtax, a tax bill of $3,800?
The 3.8% surtax applies only to couples whose AGI exceeds $250,000. Thus If you use our pre-sale AGI of $120,000, the surtax does NOT apply. But if you include in our AGI the one time profit/capital gain from the sale of our home ($600,000), then we are stuck for the surtax.
The article is confusing, at least to me.
Oh it won’t effect many people, right now. MayI remind the viewing audiance that the income tax , which we ALL PAY FOR, started out at JUST 2%……..Hmm, sounds like a familiar argument /justification.
Atax is a tax, that Libs like to collect and spend, not save……
PS suposedly OBAMA CARE helps the elderly, yet it will be the elderly, leaving their estate to their children who will behurt themost by this tax “benefit”
I agree that the tax will affect very few – throughout the Country. In Silicon Valley, it is easy to find a retired homeowner who bought their home many years ago (my unofficial turnover rate for the West Valley Area (Cupertino, etc.) is more than 18 years. Thus; the taxpayer who bought their modest home in the 70’s or 80’s in the range of $75K to $150K will be very likely a candidate for the surtax (our county median price is $685K and the cities I mention below will have a $1M+ median in aggregate). These unfairly taxed homeowners, will be quite common in years to come in the following communities I work in: Palo Alto, Menlo Park, Los Altos, Cupertino, Sunnyvale, Saratoga, Santa Clara, Campbell, Los Gatos, and a large portion of San Jose as well. All it will take is a little inflation along with the appreciation we’re experiencing now and your 2% estimate goes out the window. We also have multi-family (just your run of the mill duplex to fourplex) properties throughout the Valley that can be documented appreciating 10%+ in the past year alone. The folks most undeserving of the tax will be bearing the heaviest burden.