3.8% Real Estate Sales Tax

Just to be truthful, I am a real estate professional. I am not a tax advisor, CPA or other tax professional. As with anything having to do with taxes I suggest you talk with an expert about your personal situation.

I was just contacted recently by a friend who wanted to confirm some information he had been told about the upcoming 3.8% sales tax on real estate. I was honored that he trusted me enough to ask me for information, and pleased that he was seeking additional information and not just taking things at face value.

In case you missed it, and trust me most of Congress missed it, there is a piece of the Healthcare Package passed by Congress in 2010 that will impose a tax on some real estate transactions. Notice I use the word some not all. Despite what you may have read, only a small percentage of real estate transactions will have a tax imposed.

Several years ago Congress passed a tax law that allows people selling their primary residence to avoid capital gains taxes on a substantial portion of the gain they see. The avoidance is in the form of a tax credit. For a single person this credit is $250,000, for a married couple (filing jointly) it is $500,000. This capital gains law has helped millions of people sell their homes over the years and avoid paying capital gains taxes.

For example, say you bought your home for $200,000 some years ago. You did improvements to the home, that meet tax requirements, of $100,000. You then sell your home for $600,000. Your capital gain would be $300,000 ($600,000-$200,000-$100,000). Let’s say you are single at the time you sell the home. You would have to pay capital gains taxes equal to a gain of $50,000 ($300,000-$250,000). If you were married and filed jointly, you wouldn’t have to pay any capital gains taxes. This is perfectly legal and widely used. Check with the IRS if you don’t believe me.

In 2010 the Healthcare Act was passed and in order to pay for it, there were all kinds of new taxes and fees imposed on individuals and businesses. One of those new taxes was the 3.8% sales tax on capital gains. Some people think this new tax is only on real estate, but it is on all forms of investments, stocks, bonds, dividends, investment income, etc. Now remember our situation from above where you could incur a capital gain on the sale of your home, well guess what, that gain is also considered part of this new sales tax.

I am not going to get political on this, the law as it stands now is the law of the land and we are all bound by it. What I will say is that I have seen some really misleading information out there on this tax and how it will be applied. I read one that said that if you sold your home for $100,000 you would have to pay $3800 in sales taxes. This is just not true. Remember that you only pay taxes on the gain on the home and then you get the capital gains tax break for selling your primary residence of $250,000 and $500,000. There is no way selling your primary residence for $100,000 would result in a sales tax of $3800.

Oh, there is a second part of this sales tax that gets dropped from conversation, and that is your Adjusted Gross Income must be above $200,000 for a single person and $250,000 for a married couple filing jointly. Remember I mentioned talking with a tax professional at the beginning of this post? This is the reason I mentioned this, your AGI will be different from your neighbor, from your best friend, from your brother-in-law. Your AGI is particular to you. If your AGI is less than $200,000 or $250,000 then guess what, no sales tax on the sale of your primary residence.

I know you are thinking “Could they have made this any more complicated?” Hey, we are talking about tax laws, when haven’t they been complicated? But before someone tries to scare you to death with talk of thousands of dollars in sales taxes when you sell you home, take a moment to check with a professional to find out the facts.

About catherinetalksrealestate

I am a San Diego native who loves everything about San Diego. I enjoy camping, hiking and reading. I am a licensed real estate agent in San Diego working with Coldwell Banker.
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