Understanding The New 3.8% Healthcare Tax on Real Estate

This article was originally published on the Seattle Homes Blog:

Understanding politically-charged tax and health care issues can quickly lead to plenty of disinformation. There are far more emails and web sites disseminating incorrect information about the new health care tax on real estate than there are real guides to the issue. Anyone involved in a real estate transaction with questions about this tax should consult their own tax attorney or tax consultant, or refer to this guide produced by the National Association of Realtors.

3.8% Real Estate Health Care Tax

As a brief introduction, here are the facts:

Beginning January 1, 2013, a new tax will be levied on some real estate transactions. This tax was created to fund the U.S. health care legislation created two years ago, commonly referred to in the media as “Obamacare”, but officially termed Patient Protection Affordable Care Act.

Let’s start with the most basic issues. The new tax is levied only upon single tax filers with over $200,000 in Adjusted Gross Income (AGI) or married filers with over $250,000 in AGI.

The tax is not levied upon the value of the original basis price of the home, nor is it levied against the current tax-free gains that most home sellers of personal residences qualify for: $250,000 of tax-free gain for single tax filers, and $500,000 for a married couple filing jointly on personal residences.

At this point, all income earners under $200k/$250k are exempt, and all transactions without a gain of more than $250k/$500k are exempt. This makes up the majority of real estate transactions today.

Here is where it gets a bit tricky (seeguide for examples). For the additional gain, over and above the $250k/$500k tax-free:

The new tax applies to the LESSER of (a) Investment income amount, or (b) Excess of AGI over $200k/$250k. In other words, in some cases, this new 3.8% tax will still not apply to the gain, but could apply depending on the income makeup of the taxpayer.

All-in-all, this tax affects only a small portion of real estate sales. Many in the industry would argue, though, that any new impediments to the sale of purchases in any way should be avoided in the current economic/real estate climate. We don’t want to discourage home sales at any price level, as the offset loss of the current tax revenues from those sales would far outweigh an add-on such as this.

If nothing else, this new tax is a great example of the bureacracy of our tax code and the lack of transparency in the tax-writing process. You would be hard-pressed to find a home seller who understands the tax fully, even after reading a review of it. It’s difficult enough for a real estate broker who deals with these kinds of transactions every day. When home buyers and sellers don’t understand the process, they often react out of fear of the unknown. When we lay out clear real estate tax policy for consumers, we find home buyers and sellers make informed, rational decisions in the real estate market.