3.8% Sales Tax Myth Debunked

Many people have heard that the lawmakers decided to impose a new 3.8% tax on the net investment income of high-income persons. But the claim that this would amount to a $15,200 tax on the sale of a typical $400,000 home, for example, is utterly false.

The truth is that only a very tiny percentage of home sellers will have to pay the tax.

  • First of all, only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it.
  • And even for those who have such high incomes, the tax still won’t apply to the first $250,000 on GAINS from the sale of a personal residence — or to the first $500,000 in the case of a married couple selling their home.

The law itself is couched in highly technical language that only a qualified tax expert can fully grasp. And it does say the tax falls on “net gain … attributable to the disposition of property.” That would include the sale of a home. But the bill also says the tax falls only on that portion of any gain that is “taken into account in computing taxable income” under the existing tax code.

  • The fact is, the first $250,000 in profit on the sale of a primary residence (or $500,000 in the case of a married couple) is excluded from taxable income already. (That exclusion doesn’t apply to vacation homes or rental properties.)
  • The Joint Committee on Taxation notes: “Gross income does not include … excluded gain from the sale of a principal residence.”
  • “Some home sales would see a tax increase under this bill, but it would have to be a second home or a principal residence generating [a gain of] more than $250,000 ($500,000 for a couple).”

 

The sort of people who would have to pay the tax might include, for example:

1. A single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His tax on the sale of that vacation home would amount to $1,900, in addition to the capital gains tax he would have paid anyway.

2. An “empty nester” couple with combined income of over $250,000 a year who sell their $1 million primary residence to move to smaller quarters. If they cleared $600,000 on the sale, they would be taxed on $100,000 of the profit (the amount over the half-million-dollar exclusion). Their health care tax on the sale would amount to $3,800 over and above the usual capital gains levy.

However, a typical home sale would not incur any tax. Thus, for the vast majority, the 3.8 percent tax won’t apply. The new tax on investment income (including real estate) “will hit approximately the top-earning two percent of families” when it takes effect in 2013.

This content of this article is courtesy of Campbell & Brannon Attorneys at Law.

 

Real Time Web Analytics