3.8% Investment Tax NOT a Transfer Tax

The 3.8% tax that is part of the healthcare reform bill is NOT a real estate transfer tax.

Yes, it IS a tax.

BUT it is NOT a transfer tax.

What is it?

According to the National Association of REALTORS(R) (NAR), it is “a 3.8 percent tax on investment income of upper-income households to help shore up Medicare.”

NAR put together a brochure that explains it in more detail.

A very good example of what it could look like in a real estate transaction, from the NAR brochure:

Capital Gain: Sale of a Principal Residence
John and Mary sold their principal residence and realized a gain of $525,000.
They have $325,000 Adjusted Gross Income (before adding taxable gain).
The tax applies as follows:
AGI Before Taxable Gain $325,000
Gain on Sale of Residence $525,000
Taxable Gain (Added to AGI) $25,000 ($525,000 – $500,000)
New AGI $350,000 ($325,000 + $25,000 taxable gain)
Excess of AGI over $250,000 $100,000 ($350,000 – $250,000)
Lesser Amount (Taxable) $25,000 (Taxable gain)
Tax Due $950 ($25,000 x 0.038)

Note: If John and Mary had a gain of less than $500,000 on the sale of their residence, none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax would depend on the other components of their $325,000 AGI.

That is a good example to understand how it could affect one. That being said, it is NOT collected at settlement, and is a capital gains tax, not a real estate tax.

Another point that NAR makes in their “Top 10 Things You Need to Know about the 3.8% Tax” list:

In any particular year, if you have no income from capital gains, rents, interest or dividends, you’ll never pay this tax, even if you have millions of dollars of other types of income.

This is important to understand as well!

There are due to be tax reform debates in 2013, so it may be brought back into discussion then.

Until that point, from the beginning of 2013, this would be in effect — but not paid until your 2013 tax returns are filed in 2014, if you were to have made enough money on a sale of something on which you would need to pay capital gains.

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