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3.8% Real Estate Tax – Fact or Myth?

Wow- it seems that every few months an email chain resurfaces inaccurately stating that President Obama’s health care bill created a “real estate tax” of 3.8% and that this tax will affect all real estate transactions.

 Here are the facts: 

Beginning January 1, 2013 a new 3.8 percent tax on some investment income will take effect. Not all investment income taxed will be real estate related and not all real estate transactions will be taxed.

To clear up the confusion the National Association of Realtors® has put together a great Q&A. Below is an excerpt. It you would like a copy of the complete Q&A and/or a copy of their brochure “The 3.8% Tax – Real Estate Scenarios & Examples” let me know. I’d be happy to email them to you. 

 Q-1: Who will be subject to the new taxes imposed in the health legislation?

A: A new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. Another 0.9% tax will apply to the “earned” income of many of these same individuals. Both levies are referred to as “Medicare” taxes. (For a description of the new 0.9% tax, see separate Q&A entitled “NEW TAX ON EARNED INCOME: WAGES, SALARIES AND COMMISSIONS.”)

 Q-2: Who is a “High Income” Taxpayer?

A: Those whose tax filing status is “single” will be subject to the new unearned income taxes if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return with AGI of more than $250,000 will also be subject to the new tax. (The AGI threshold for married filing separate returns is $125,000.)

  Q-5: What is “unearned” net investment income?

A: Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business.

 Q-9: Will the $250,000/$500,000 exclusion on the sale of a principal residence continue to apply? A: Yes. Any gain from the sale of a principal residence that is less than $250,000 (individual) or $500,000 (joint return) will continue to be excluded from the income tax. The new 3.8% tax will NOT apply to this excluded amount of the gain.

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