False Reports on 3.8 Real Estate Transfer Tax

There are incorrect stories being circulated about a real estate transfer tax or sales tax that came about with the new health care law.

The fact is that on certain high income individuals with net investment income an additional 3.8% tax on the net investment income that exceeds $250,000 of adjusted gross income to the extent there may be net investment income.

Since the gain on the sale of a home for a married couple must exceed $500,000 before any becomes "net investment income" and is taxable - only to the extent that the gain on the sale of a home exceeds the $500,000 and pushes your family adjusted gross income over $250,000 would the tax be imposed.

For single individuals, the income level is $200,000 and the gain on the sale of a home non-taxable limit is $250,000.

If you did have a taxable gain on the sale of a home it would be a capital gain and taxed at substantially lower rate than earned income anyway.

As you can see, the rumors about a transfer tax which, which most people look at as a sales tax are incorrect. A correct example of a transfer tax would be if you sold your car. In that case, the entire proceeds on the sale of a car are subject to a sales tax - not just the profits.

Here is an example of the law as I understand it. Assume a couple makes $200,000 a year of adjusted gross income which includes $20,000 of dividends, interest, and net capital gains. However, they sell their home for a million dollars. They bought the home for $300,000 twenty years earlier and spent $50,000 on putting in a new pool and spent $20,000 for a new roof and another $20,000 for a new A/C system and other landscaping and capital repairs. So their basis in the home is $390,000. When they sold their home they paid $60,000 commission and another $20,000 of closing costs. So, their net proceeds from the sale was ($1,000,000 minus $60,000 minus $20,000) $920,000. Consequently their gain on the sale is ($920,000 minus $380,000)$530,000. Since their gain is $30,000 more than the tax free $500,000 gain for the sale of their home - that amount would be added into net investment income.

In our couples case, their adjusted gross commission income was $200,000 and if you add in the $30,000 of net investment income from the home sale - they still do not exceed the $250,000 threshold over which net investment income becomes taxable at 3.8percent. So,there would be no tax.

A true transfer tax is a sales tax. Gain has nothing to do with it. This is not a transfer tax.