Palm Coast, FL – September 27, 2010 – GoToby.com received a misleading email forwarded by several readers. The email says, ''Under the new healthcare bill, did you know that all real estate transactions are subject to a 3.8% 'Sales Tax'?'' The effect on the sale of a $400,000 home will be a $15,200 tax, it claims. The tax is supposedly hidden in the new Patient Protection Affordable Care Act (PPACA aka ObamaCare) and is set to kick off in 2013. Snopes debunks the often-forwarded email's claim.
A sliver of truth at the core or the email's exaggeration originates from a provision in ObamaCare which will subject high-income households to a new 3.8% Medicare tax on certain investment income beginning in 2013. The Act states:
The PPACA creates a new Code Section 1411, which will generally impose a 3.8 percent tax on the lesser of "net investment income" or the excess of modified adjusted gross income over a "threshold amount" (generally, $250,000 for taxpayers filing a joint return, $125,000 for married taxpayers filing a separate return and $200,000 in all other cases). Net investment income generally means the excess of (i) interest, dividends, annuities, royalties, rents, income from passive activities, income from trading financial instruments and commodities, and gain from the disposition of certain non-business property, over (ii) allowable deductions properly allocable to such income. In determining the amount of net investment income, special rules apply with respect to dispositions of equity interests in certain partnerships and S corporations, and to distributions from certain qualified plans. This additional tax applies to taxable years beginning after December 31, 2012.
What does it mean?
What happens if a couple with a combined income over $250,000 sells their home netting a gain of $650,000 (net selling price less cost basis)? Assuming they had lived in the home for two years, the first $500,000 gain is non-taxable. They would have to pay 3.8% of $150,000, or $5,700 in new Medicare tax.
Since the median price of homes sold in Flagler County is running about $135,000, only a small handful of local homeowners need to be concerned about the new tax.
Next time you receive a copy of the misleading email, "Reply All" with a link to this story.
Disclaimer: I am a licensed Realtor®, but I am neither an attorney nor an accountant.