3.8% real estate tax won't affect most

Beginning January 1, 2013, a new 3.8 percent tax on some investment income

will take effect. Since this new tax will affect some real estate transactions, it is

important for sellers. to clearly understand the tax and how it could impact their sale. It’s a complicated tax, passed by Congress in 2010 with the intent of generating

an estimated $210 billion to help fund President Barack Obama’s health care

and Medicare overhaul plans.

Understand that this tax WILL NOT be imposed on all real estate transactions,

a common misconception. Rather, when the legislation becomes effective in 2013,

it may impose a 3.8% tax on some (but not all) income from interest, dividends,

rents (less expenses) and capital gains (less capital losses). The tax will fall only

on individuals with an adjusted gross income (AGI) above $200,000 and couples

filing a joint return with more than $250,000 AGI. Most people are not in this category. However, the capital gain on the sale of real estate will be added to your AGI. If you have a large gain on the sale of your real estate, it could push you up into the higher category.

This new tax was never introduced, discussed or reviewed until just hours before the final debate on the massive health care legislation. That legislation was enacted on March 23, 2010, more than a year after the health care debate began. This new tax was put forward after Congress was unable to agree on changes to current law that were sufficient to pay for the proposed changes to the Medicare program and increased subsidies to individuals and businesses. The new tax raises more than $210 billion (over 10 years), representing more than half of the total new expenditures in the health care reform package. NAR expressed its strongest possible objections, but the legislation passed on a largely party line vote. The new tax is sometimes called a “Medicare tax” because the proceeds from it are to be dedicated to the Medicare Trust Fund. That Fund will run dry in only a few more years, so this tax is a means of extending its life.

A second new tax, also dedicated to Medicare funding, is imposed on the so-called “earned” income of higher income individuals. This earned income tax has a much lower rate of 0.9% (0.009). This additional or alternative tax is based on adjusted gross income thresholds of $200,000 for an individual and $250,000 on a joint return. Like the 3.8% tax, this 0.9% tax is imposed only on the excess of earned income above the threshold amounts. 

Another way of thinking about these new taxes is to think of the 3.8% tax as being imposed on a portion of the money that you make on your money — your capital (sometimes referred to as “unearned income”). The 0.9% tax is imposed on a portion of the money you make on your labor — your salary, wages, commission and similar income related to earning a livelihood.