Rumor of 3.8% Real Estate Sales Tax Imbedded in ObamaCare is ‘Mostly False’

Snopes debunks an often-forwarded email’s claim of an upcoming sales tax on all real estate transactions. According to the email, the new tax will kick off in 2013.

Palm Coast, FL – September 27, 2010 – 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.
5 replies
  1. Sam Wilson
    Sam Wilson says:

    Domino Effect

    I guess people do not realize that taxing people that make over 250K combined income will create a domino effect. I know plenty of people in that income level and those people will not continue to invest in property. They will also not hire the extra employee or might even have to close the door on their small business. When you consider all the hidden taxes that will go into effect over the next few years then don’t expect the housing market to recover.

  2. Dave Sullivan
    Dave Sullivan says:

    3.8 Tax 2012

    So it is not a rumor for those who will have pay the new tax. What if people are selling a second home not their primary residence. It is a new tax although not one that will impact most people. Problem is that those whom it will impact are the ones who invest and create jobs. It was put in the Medical Bill to make the financial impact look better than it really will be. I predict this aspect of the Bill will becdropped before it takes effect.

  3. jp
    jp says:

    Thank Goodness

    Love the disclaimer, Toby. Of course you’re neither an accountant or attorney. That’s why people read you site. You’re trustworthy, de facto.
    Keep it up!

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