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3.8% Real Estate Sales Tax? Here Are The Facts

The tax man cometh. In 2013.

As a Boston real estate agent one of my jobs is to help sellers understand how much money they're going to net after they sell their home. After the health care bill was passed, there was talk of a "sales tax" of 3.8% on the sale of your home, which it is not. This is a 3.8% tax on net profits over a certain level (see below). This posting is not about politics. Whatever your political leanings are, it's important to know what the numbers are going to be when you sell your home starting in 2013.

Roughly 98% of American families will not be affected by this tax. But there are a significant number of homeowners in downtown Boston who will have to pay it. Better to be informed than not.

Those exempted from this are the same folks who are exempted from capital gains on the sale of their home. To claim the exclusion (exclude up to $250,000 of the gain from your income or $500,000 on a joint return in most cases), you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have owned the home for at least two years (the ownership test), and lived in the home as your main home for at least two years (the use test).

Here are the facts:

  • The new Medicare tax on real estate sales is actually a 3.8% tax on net profits above a certain threshhold (see below) on all types of investment income for so-called “high earners.” A high earner is defined for this purpose as individuals with incomes over $200,000/married couples filing jointly over $250,000. Obviously, this applies to many folks in our downtown neighborhoods.
  • These people will be taxed 3.8% of all net profits over $250,000 ($500,000 for married couples filing jointly) for a particular transaction.
  • Even if you meet the income criteria, you will not be taxed on the first $250,000 ($500,000 for married couples) of net profits (profits after costs of sale such as broker fees, staging, advertising, legal fees, etc.) in a particular transaction.
  • Check with your accountant, but the cost of improvements to your home, as well as costs you incurred to purchase it can ameliorate the taxable net profit figure to by adding to the adjusted basis.  This refers to additions or subtractions to your home's value.  The original basis is the cost of the home when you first purchased or built it. That includes what you paid for the property, as well as closing costs and settlement fees.

These are the same criteria that the IRS uses to calculate the capital gains tax.  For more detail on this subject, go to this informative article and IRS publication 523.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

John Keith July 29, 2011 at 02:17 PM
Fascinating and very informative. Thanks!
Joe Wolvek August 03, 2011 at 12:06 PM
Thanks, John. There's been so much deliberate misinformation out there, that I thought this bore repeating....

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