Is there a new 3.8% "sales tax" on real estate in the Health Care Bill?

By
Real Estate Agent with Kimberly Howell Properties (210) 646-HOME

An image of the first page of the health care bill.3.8% Real Estate Sales Tax - True or False?

You may have received an email or heard something on Twitter about the 3.8% real estate sales tax that has recently been brought up as an issue with the Health Care Bill (HR 3200).  In the emails, the tax is railed against and brought up as an absolute for all Americans selling their homes.

But wait...maybe we should dig further.  Is it true?  Is it kind of true?  Is it blatantly false?  Does it lie somewhere in between?  Seems this is just another case of email first, tell the truth later.

There is indeed a 3.8% tax in the Health Care Bill.  It, however, is incorrectly labeled as a sales tax.  It is called a Medicare tax in the legislation and I know we're splitting hairs here, but I think it's important to mention as the use of specific words like this are calculated and planned by people to manipulate people's emotions.

This tax however, does not single out real estate, rather it is a tax on investment income.  The key to everything is how the numbers are calculated on whether or not the tax applies to you.  The 3.8% Medicare tax is designed to only affect so-called "high earners" and not everyone will pay the tax upon the sale of their home.

The Tax Facts

  • There is a new 3.8% tax in the bill.
  • It is not a "sales tax" on all real estate transactions.
  • It is a Medicare tax.
  • Many people will not have to pay this tax.
  • It is going to affect so-called "high earners."
  • It is not going affect many people.
  • The tax comes into effect in 2013.

"High Earners" - Who are they?

The income requirement for so-called "high earners" are spelled out in the new law: $250,000 for married couples filed jointly, $125,000 for couples filing separately, and $200,000 for all others.  If you earn more than these benchmarks, you are a "high earner" and therefor subject to the new 3.8% tax, but what you are taxed on helps further eliminate many people.

How is the tax calculated?

One of the emails I've seen states that on the sale of a $400,000 home, you would pay $15,200 as a real estate sales tax (3.8% x $400,000).  This is incorrect.  There are two incorrect assumptions by the authors of the email; a) that the Medicare tax is based off of sales price alone and b) it applies to everyone (which we know to be false based on the "high earner" income requirement).

The incorrect assumption that the real estate sales tax (aka the Medicare tax) is calculated based on the sales price of the home makes a huge difference.  Instead, the tax is calculated based on profit.  As investment income, the profit is the sale price minus the initial investment.  Going back to the $400,000 home mentioned earlier, let's assume you paid $350,000 for it.  You profited $50,000.  Based on that, your tax would be $1,900 (3.8% x $50,000).  Much better than $15,200, right?

But wait, there's one more piece of the puzzle.

Okay, so you owe $1,900, which isn't that bad in the overall scheme of things.  But wait...do you owe $1,900?  The answer is a resounding no.  Why?  Because of the capital gains threshold that is included in the language.  You are only charged the 3.8% Medicare tax if your investment income passes the capital gains threshold.  How much is that?  The capital gains threshold is $250,000 for individuals and $500,000 for married couples filing jointly.

This means that profit over the $500,000 or $250,000 (depending on your marital status) would be taxed at the 3.8% rate (you would still need to be classified a "high earner").  In our $400,000 example above, where you walked away with $50,000 in profit, you would not be taxed.  The $50,000 is below the capital gains threshold.

Want to see more examples with calculations?  Visit "3.8% “Real Estate Sales Tax” thanks to Health Care Legislation?"

Although this topic has political implications, the intent of the post is not to debate opinions about the health care bill, taxes, or politics in general.  No matter what you believe politically, the post is designed to inform - not to debate, attack, or throw mud at those that don't agree with you.  I ask that all visitors respect that on my blog.  There are plenty of political forums where that is acceptable and I encourage you to visit them if you wish to discuss such matters.  Thanks in advance - Matt

photo courtesy of Listener42

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Re-Blogged 16 times:

Re-Blogged By Re-Blogged At
  1. Paige Walker 04/27/2010 04:14 PM
  2. Lenn Harley 04/27/2010 04:55 PM
  3. James Downing - Metro DC Houses Team REALTORS®, CRS, GRI, ABR,MRP, MilRes 04/28/2010 09:28 AM
  4. Tammy Woodin 05/25/2010 11:24 AM
  5. Bob Willis 06/27/2010 11:13 AM
  6. Erick Blackwelder 07/20/2010 05:58 PM
  7. Diane McDermott 07/21/2010 10:26 AM
  8. Maureen Megowan 09/20/2010 10:38 PM
  9. Gail C. Harris 09/21/2010 09:41 AM
  10. Karen Crowson 09/21/2010 10:31 AM
  11. Julie Cendejas 09/21/2010 12:37 PM
  12. Courtney Cooper 09/21/2010 01:00 PM
  13. Larry Kantner 09/22/2010 12:07 PM
  14. David Krichmar 09/22/2010 01:33 PM
  15. Robin Scott 10/01/2010 07:47 PM
  16. Michael Dagner 07/20/2011 04:23 PM
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Ambassador
2,360,415
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Of course, IMO, this tax is just piling on the consumer will be paying federal/state/loal tax on that gain. 

April 27, 2010 04:58 PM #4
Rainmaker
307,718
Susan Brown
Keller Williams NE, Kingwood Texas (Humble & Atascocita too) - Kingwood, TX

Matt - Thanks for the clarification on the tax.  Sometimes we go off running without making sure of the facts.

April 27, 2010 08:22 PM #5
Ambassador
883,319
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

It is a huge difference, but remember that all of their regualr income, plus the profit from the home will be the total income.  There will be a lot of sellers that could find themselves among "the rich" when they sell their homes...  Especially retired folks that are downsizing. 

April 27, 2010 08:34 PM #6
Ambassador
747,898
Steve Shatsky
Prudential Texas Properties - Dallas, TX
Dallas Real Estate & Short Sale Specialist (214)213-0340

Hi Matt... there is so much blatant misinformation out there about this.  The scare tactics used by some people are growing quite tiresome.  Thanks for sharing the facts!

April 27, 2010 11:11 PM #7
Rainmaker
1,817,307
Gabe Sanders
the BlueWater Realty team specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Matt, very nice job explaining the truth about this fee - tax, whatever one wants to call it.  There's a lot of misinformation going around that's meant to scare people.

April 28, 2010 07:16 AM #8
Rainmaker
311,006
James Downing - Metro DC Houses Team REALTORS®, CRS, GRI, ABR,MRP, MilRes
Real Living | At Home - Washington, DC
When Looking to Buy or Sell - Make the Right Move

Great job at explaining this.  I so hate all the emails and stuff when folks dont take time to check the facts!

April 28, 2010 09:11 AM #9
Rainmaker
270,631
Matt Stigliano
Kimberly Howell Properties (210) 646-HOME - San Antonio, TX

Lane - It's on investment income though, so you're daily working income is not part of that.

I'll respond a bit later...time to zip off and do a few things.

April 28, 2010 05:17 PM #10
Rainmaker
270,631
Matt Stigliano
Kimberly Howell Properties (210) 646-HOME - San Antonio, TX

Unfortunately, this post came at the wrong time (during ActiveRain's recent downtime), so I feel as if a lot of people probably missed it.  Hopefully, it will continue to be popular is search engines for awhile so that more consumers have a chance to read up on this.

May 04, 2010 11:13 AM #11
Rainmaker
238,635
Dominick Dina
Christian Realty San Antonio - San Antonio, TX
MA, GRI, e-PRO, TAHS, SFR

Well Matt, you are correct and a tip of the hat to you for sharing.  Misinformation is bad!!!

There IS a proposed license on all homes to ensure they meet proposed energy guidelines in the draft Cap and Trade bill.  Now this WILL impact real estate.  Oh my.

Dominick

May 08, 2010 02:12 PM #12
Ambassador
2,387,210
Patricia Kennedy
Evers & Company Real Estate, Inc. - Washington, DC
For Your Home in the Capital

Matt, thanks for the facts on this one!  There is so much misinformation going around about this one.

July 03, 2010 09:48 AM #13
Rainmaker
420,591
Leslie Ebersole
Baird&Warner Fox Valley - Saint Charles, IL
REALTOR - Chicagonulls Western Suburbs

Thank you for a well-written and very clear explanation of this topic. We've also received these inaccurate emails, usually with some poorly spelled and inarticulate spewings of hate.

July 04, 2010 02:23 PM #14
Rainmaker
86,524
Curt Hess
Keller Williams Select Realtors - Annapolis - Annapolis, MD
Luxury Home Consultant, Team Leader & CEO

At some point in our existence, Americans need to ask the fundamental question: Are we the only "modern society" without 100% healthcare coverage for every one? Especially when we, as a people, are not willing to throw sick citizens into the gutter -- we WANT people to have some level of treatment, yes? That being the case, the way we go about treating is so outrageously expensive that we must find a better way of going forward. Honestly better.

I spent about 10-years working in the healthcare financial world. While none of us like the idea of "government run healthcare", I can tell you that "insurance company run heathcare" is really really bad. Every company lives by the capitalistic operative: Maximize My Profits -- it's the obligation of the executives of the company. So, when a decision about treatment is "Shall we spend $1M saving that child, or shall we keep the money because we aren't legally required to do that new course of treatment?" -- We know the answer, and it ends with "Sorry, it's just business."

We KNOW we have the most inefficient system in the world, paying more than 200% of the next highest in the world, while getting less than 50% of the quality of service.

Something has to change, and somehow we have to find the political courage to solve the problem.

Maybe.

 

July 05, 2010 01:56 PM #15
Rainmaker
305,086
Erick Blackwelder
Cell: 703-677-1120 - Woodbridge, VA
Text or call Erick now at 703-677-1120.

Mike,

Did you post this on Facebook as a Note?

Erick Blackwelder
Exit 1st Choice Realty
Woodbridge, VA

July 20, 2010 05:56 PM #16
Ambassador
672,151
Karen Crowson
Alain Pinel Realtors, Pleasanton, CA - Livermore, CA
Livermore Wine Country Homes

Matt, great detail, thank you.  I've just re-blogged and suggested it. Perhaps this will slow down the email forwards I've seen frequently on the topic, creating anxiety in those who receive it.

September 21, 2010 10:32 AM #17
Rainer
63,330
Ed Tseng
El Sobrante, CA

How much more taxes will this new tax collect? How many "RICH" sellers will the government receive additional tax from? Is this a good use of tax payer's money to come up with a foolish tax like this? 

September 21, 2010 10:46 AM #18
Rainmaker
270,631
Matt Stigliano
Kimberly Howell Properties (210) 646-HOME - San Antonio, TX

Since this post seems to be getting some renewed attention, I'd like to remind everyone of my request:

Although this topic has political implications, the intent of the post is not to debate opinions about the health care bill, taxes, or politics in general.  No matter what you believe politically, the post is designed to inform - not to debate, attack, or throw mud at those that don't agree with you.  I ask that all visitors respect that on my blog.  There are plenty of political forums where that is acceptable and I encourage you to visit them if you wish to discuss such matters.  Thanks in advance - Matt

I've already seen some hints at what I dislike over on Alan May's post on the same subject.  While I do believe everyone has the right to say what they will for/against bills of this nature and I encourage public debate on political issues, I do not wish for my blog to be brought down into some of the political back and forth that I have seen here on ActiveRain.  It's not my cup of tea and it's not what my blog is all about.  My mission is to inform and educate readers on real estate, San Antonio, and the occasional odd ball this or that as it pertains to my life as a Realtor®.  Thanks for respecting that.

September 21, 2010 11:21 AM #19
Anonymous
Anonymous
Iris Shamas

Matt thanks for the information - it has helped clearify the 3.8% tax issue for me.  I also need to thank Alan May because I would have missed it if it was not for his blog.

September 22, 2010 10:01 AM #20
Anonymous
Anonymous
Deano

Thanks Matt.  Very well done.  It's getting more attention again because local associations are sending it around and yours is the best explanation I read so far.

Curt from Anapolis, who in July,  took the only liberal position on this seems to imply the end justifies the means.  I don't believe government is ever the answer over free market.  Government is (and they are proving it big time now) usually part of the problem.  Even the greedy bankers wouldn't have caused so much difficulty in our market if the Congress would have kept their noses out of it.

This is an arbitary tax on select groups of individuals. Tax, fee;  more taxes, more fees;  local, state, federal.  When is it going to stop?   By the way folks, the Obamacare bill isn't about health care -- it's about control of the money!

September 23, 2010 04:22 PM #21
Anonymous
Anonymous
Earl

Thanks for the information.  However,  with the repeal of the Bush Tax Cuts coming which I believe does away with the current structure for capital gains,  will the gains associated with the sale of real estate be considered ordinary income?  Under the old code,  unless you purchased a home of equal value or more the gain was treated as ordinary imcome.  This could effect more people who might be considered "high earners".

The article I read referred to those of us "baby boomers" ready to retire.  In many cases these people have significant profit in our property.  If your example was applied to someone in this class,  they would not only pay the 3.8% Medicare Tax but have to pay Capital Gains Tax.  Is this not double taxation on the same money by the Federal Government?

Thanks

September 30, 2010 11:52 AM #22
Rainmaker
222,360
Doug Jones
Mortgage Magic - San Jose, CA
Mortgage Broker - NMLS 286668

Thanks for writing this..I rec email today and was wondering

October 01, 2010 07:50 PM #23
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Matt Stigliano

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