Does health care law include a home tax?
WASHINGTON — When the Supreme Court upheld the health care reform law on federal tax grounds, it restoked a housing issue that had been relatively quiet for the past year: the alleged 3.8 percent "real estate tax" on home sales beginning in 2013 that is buried in the legislation.
Is there really a 3.8 percent transfer tax on real estate coming in 2013? Does it preempt the existing $250,000 and $500,000 capital gains exclusions for single-filing and joint-filing home sellers, as some emails have claimed?
Here's a primer: Yes, there is a new 3.8 percent surtax that takes effect Jan. 1 on certain investment income of upper-income individuals — including some of their real estate transactions. But it's not a transfer tax and not likely to affect the vast majority of homeowners who sell their primary residences next year. In fact, unless you have an adjusted gross income of more than $200,000 as a single-filing taxpayer, or $250,000 for couples filing jointly ($125,000 if you're married filing singly), you probably won't be touched by the surtax at all, though you could be affected by other changes in the code if Congress fails to extend the Bush tax cuts scheduled to expire at the end of this year.
Even if you do have income greater than these thresholds, you might not be hit with the 3.8 percent tax unless you have certain types of investment income targeted by the law, specifically dividends, interest, net capital gains and net rental income. If your income is solely "earned" — salary and other compensation derived from active participation in a business — you have nothing to worry about as far as the new surtax.
Where things can get a little complicated, however, is when you sell your home for a substantial profit, and your adjusted gross income for the year exceeds the $200,000 or $250,000 thresholds. The good news: The surtax does not interfere with the current tax-free exclusion on the first $500,000 (joint filers) or $250,000 (single filers) of gain you make on the sale of your principal home. Those exclusions have not changed. But any profits above those limits are subject to federal capital gains taxation and could also expose you to the new 3.8 percent surtax.
Julian Block, a tax attorney in Larchmont, N.Y., and author of Julian Block's Home Seller's Guide to Tax Savings, says it will be more important than ever to pull together documentation on the capital improvements you made to the property and expenses connected with the house — including settlement or closing costs, title insurance and legal fees — that increase your tax "basis" in order to lower your capital gains.
The 3.8 percent levy can bite deeper when your taxable capital gains are far larger or you sell a vacation home or a piece of rental real estate, where all the profits could subject you to the investment surtax. Talk to a tax professional for advice.