There has been much (uninformed) debate on the web about the possible existence of a tax on real estate sales within the new health care bill passed by Congress and the President this year. It's been called a "sales tax", "transfer tax", "income tax", and some have even said it doesn't exist at all.
Let's set the record straight-no politics, just facts. This is a tax that affects a very small number of Americans directly. It is, however, particularly significant for waterfront and luxury real estate owners. It could also be significant to builders, contractors, tradesmen, and others in the real estate industry who are dependent on real estate sales for their employment. (Thanks to Lane Bailey over at ActiveRain for the thorough analysis of the subject-some of his research points synopsized here).
There is indeed a tax that affects the sale of real estate in the new health care law passed this year.Starting in 2013, individuals with incomes over $200,000 will have to pay a 3.8% tax on profit from the sale of their primary residence or investment properties over a certain profit threshold. The exact amount will be based on a formula that includes the profit from the property and the income above $200,000. The tax is not an income tax, but rather it is a "payroll tax"... officially it is a Medicare Tax.This new tax applies to investment income, dividends, real estate profits- all "unearned income".
Here's the gist of it:
A person with an income of $200,000+ purchased an investment property for $400,000.
The home is now sold for $1,000,000, a $600,000 profit.
The full $600,000 profit is applied to the new tax rate of 3.8% ($22,800 new tax) plus the usual income tax rate.
-or-
A person with an income of $200,000+ purchased a primary home for $400,000.
The home is now sold for $1,000,000, for a $600,000 profit.
The first $250,000 profit is tax-free.
The additional $350,000 is subject to the new 3.8% tax, costing $13,300 (plus the applicable income tax).
-or-
A married couple with an income of $250,000+ purchased a primary home for $400,000.
The home is now sold for $1,000,000, a $600,000 profit.
The first $500,000 profit is tax-free.
The additional $100,000 is subject to the new 3.8% tax, costing $3,800 (plus the applicable income tax).
A person with an income of $200,000+ purchased an investment property for $400,000.
The home is now sold for $1,000,000, a $600,000 profit.
The full $600,000 profit is applied to the new tax rate of 3.8% ($22,800 new tax) plus the usual income tax rate.
-or-
A person with an income of $200,000+ purchased a primary home for $400,000.
The home is now sold for $1,000,000, for a $600,000 profit.
The first $250,000 profit is tax-free.
The additional $350,000 is subject to the new 3.8% tax, costing $13,300 (plus the applicable income tax).
-or-
A married couple with an income of $250,000+ purchased a primary home for $400,000.
The home is now sold for $1,000,000, a $600,000 profit.
The first $500,000 profit is tax-free.
The additional $100,000 is subject to the new 3.8% tax, costing $3,800 (plus the applicable income tax).
A married couple who makes less than $500k profit on their primary home will pay no extra tax, and a single person who makes less than $250k profit on their primary home will pay no extra tax.
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Sam DeBord is a Realtor and real estate broker with SeattleHome.com, a division of Washington State Realty, LLC. He is a member of the Seattle-King County Association of Realtors and a Green-Certified Pro.
Have a question about this waterfront home, or Seattle real estate in general?
Sam can be contacted at (206) 658-3225 or Sam(at)SeattleHome.com.
Sam can be contacted at (206) 658-3225 or Sam(at)SeattleHome.com.
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