Will the 3.8% Tax on Real Estate Affect You?

3 May

As you may have heard, the federal government has implemented a new tax on real estate transactions that will become effective January 1, 2013. There are many misconceptions about properties and taxpayers that will be subject to this new tax – read on for some good news if you are concerned!

The tax is NOT on the sale or purchase price of the property.  The tax relates to the capital gain (profit) realized between the original purchase price and the final sale price the seller received. It is NOT a tax to the buyer.

The seller will only pay (all or part) of the tax in very unique situations:

  • The seller must have a minimum Adjusted Gross Income (AGI) of $200,000 as an individual or $250,000 for joint filers
  • Anyone with income less than $200,000 AGI ($250,000 joint filers) will NOT be subject to the tax
  • There must be a gain (profit) between the original purchase price and the final sale price which exceeds $250,000 as an individual ($500,000 joint filers)
  • Any transaction with a gain (profit) of less than $250,000 ($500,000 joint filers) will NOT be subject to the tax

Qualifying Criteria:  If the seller makes more than $200,000 ($250,000 joint filers) AND if the capital gain on the sale of the property exceeds $250,000 ($500,000 for joint filers), the tax needs to be calculated.

  • The tax is NOT 3.8% of the sale price
  • The tax is NOT 3.8% of the entire gain (in most cases)

Here is a real world example of how the tax is calculated IF the two qualifying criteria are met:

John and Mary Smith are a married couple filing jointly.

AGI before adding taxable gain $325,000
Original purchase price of home $150,000
Sale price of home in 2013 $675,000
Gain on sale of residence $525,000
Taxable gain ($525,000 – $500,000) $25,000
New AGI $350,000

The tax is calculated on the LESSER of (a) the amount of the gain or (b) the excess AGI over the $200,000 ($250,000 joint filers) amount. Since the $25,000 is less than the $100,000 excess ($350,000 income less $250,000 joint threshold); the tax is calculated on the $25,000 gain.

$25,000 X 3.8% = $950 tax due on a gain (profit) of $525,000.

So, you see that this tax will have zero impact on most residential real estate transactions in our market.

Remember the take-aways:

  • Your AGI must exceed $200,000 ($250,000 for joint filers)
  • You must have a capital gain on the sale of your property which exceeds $250,000 ($500,000 joint filers)
  • The tax is calculated on the GAIN (profit), not on the sale price
  • The tax is calculated on the lesser amount of the gain or the excess of AGI over the $200,000 ($250,000 for joint filers) threshold
  • The buyer never pays any portion of the tax
  • Most sellers will not be subject to the tax – only those meeting the qualifying criteria in the first 2 points

If you need further explanation, please consult with your tax accountant or tax attorney.

By Phyllis Brookshire (Senior Vice President)

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