The new health care legislation includes a 3.8% Medicare tax that may apply to certain real estate transactions in certain very specific circumstances. Unfortunately, this has been misreported all over the internet in some alarming ways.
For example: “The new health care legislation imposes a 3.8% tax on all home sales.” “If you sell your home for $400,000, you’ll pay a $15,200 ‘sales tax.'” “Middle-income people will pay the full tax even if they’re only ‘rich’ the day they sell their home.”
Please note: Every one of the above statements is COMPLETELY FALSE.What the Law Really Says One of the provisions of the Patient Protection Affordable Care Act (PPACA) health care legislation makes so-called “high-income” households subject to a new 3.8% Medicare tax on investment income beginning in 2013. All the misreporting arose because this provision is contained in a complicated section of a complicated piece of legislation.
But here are the facts: The Medicare tax is not a 3.8% “sales tax” on all real estate transactions. In truth, it is not a sales tax at all and it does not apply to all real estate transactions. The 3.8% Medicare tax is a tax on investment income (which may or may not come from the sale of a property). And it is for persons who earn more than certain amounts specified in the bill. When you sell your home, there is still a capital gains threshold of $250,000 per individual or $500,000 per couple. This is profit NOT subject to capital gains tax. However, you will be required to pay the added 3.8% Medicare tax on any gain you realize above your applicable threshold. Most Home Sellers Not Affected Experts tell us most people selling their homes won’t be impacted by this new regulation. Your home sale would have to make you a so-called “high earner” and here’s what that would take. For example, a couple will be subject to the 3.8% tax only if they made MORE THAN $500,000 profit on the sale of their home. And if they did, the 3.8% tax would apply only to the part of that profit that was ABOVE $500,000. So, if their profit were $600,000, they would have to pay $3,800 of that as tax–3.8% of the $100,000 profit above the $500,000 threshold. Their net profit would still be: $596,200.
I hope this clearly explains how the 3.8% Medicare tax is not a tax on all real estate sales. Instead, it is a tax on investment income that may result in an extremely small percentage of home sellers paying additional taxes on their home sale profits above the designated threshold amount that applies to them ($250,000 for individuals, $500,000 for couples). It has been estimated that the bill’s definition of “high earners” includes less than 5% of all taxpayers.In addition, as of March 2011, the median existing home sale price was $159,600. So, mathematically, only a small percentage of home sales will likely be affected when the Medicare tax is implemented in 2013. As always, consult with a professional tax advisor before making any decision with tax implications.
The opinions expressed in this article are entirely my own and do not necessarily represent the views of Guild Mortgage Company.
Chris Butaud, CPA
Loan Officer NMLS 13157