Internet posting skews surtax
The old expression used to be, "Don't believe everything you read in the papers," but we've since updated that phrase to, "Don't believe everything you read on the Internet," even if it's partially true.
There's been an e-mail floating around which beached itself on my computer a week ago that said in part, "Under the new health care bill, did you know that all real estate transactions are subject to a 3.8 percent sales tax? If you sell your $400,000 home, this will be a $15,400 tax, regardless of income."
Since I pay pretty close attention to what's going in Washington, especially as it relates to real estate, I couldn't believe this escaped my fine tuned antenna. It only took about a half hour buzzing around the Internet for faith in my antenna to be restored. Here's what I found:
As we all know, the federal government enacted a sweeping health care reform bill, which in the final Senate version was more than 2,000 pages, longer than "War & Peace." It's no wonder that much of what's contained in that bill is just starting to surface, including a last minute addition. The last minute piece of legislation included a 3.8 percent tax on investment income of upper-income households as a revenue generator to offset some of the costs of the reform, which takes effect in 2013.
Contrary to what is working its way through the Internet, it is not a transfer tax on real estate. It is, however, a surtax levied on certain high income families who also meet other criteria. For example:
To start with you have to be an individual with an adjusted gross income of $200,000 or more or a married couple earning $250,000 or more to even be subject to the tax. Then, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. Investment income includes capital gains, dividends, interest payments and net rental income, if you own investment property.
There are several different ways this surtax could affect a real estate transaction:
One was is if a couple earns capital gains on the sale of their primary residence over the $500,000 exemption or any capital gains on the sale of a second home, since there is no tax exemption on capital gains for second homes. Also, inherited property is not protected by a capital gains exemption, and neither is investment property.
Remember the actual tax assessed on any of these real estate transactions that involve a capital gain are based on adjusted gross income being over the $200,000 or $250,000 limit. One example I found in an article published by Realtor magazine is a married couple that has a $325,000 adjusted gross income plus $525,000 in capital gains from the sale of their primary home. For this couple, only $25,000 in capital gains income would be subject to the 3.8 percent tax which would amount to $950.
Although the "Medicare tax," as it's being called, since the funds it generates is targeted to go to Medicare, is minor by most tax standards, it's still another consideration for individuals purchasing real estate. In particular, second home and investment buyers will want to pay close attention if and when this tax finally takes effect. Always seek the advice of a professional tax consultant before making any investment decisions.
A little knowledge can be a dangerous thing. A lot of what we read on line is tremendously helpful, some is outright false, and some have pieces of truth mixed up with misinformation. The advice, "Trust but verify," is true now more than ever.
