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-Bloggged 16 times:

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Rainmaker
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Matt Stigliano
Kimberly Howell Properties (210) 646-HOME

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
Anonymous #20
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
Anonymous #21
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
Anonymous #22
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
Rainmaker
211,517
Doug Jones
Mortgage Broker - NMLS 286668
Mortgage Magic

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

October 01, 2010 07:50 PM
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Matt Stigliano

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