3.8% Real Estate Tax Impending in 2013?

There’s been an e-mail circling around Indianapolis and Central Indiana lately about a provision in the new health care bill that allows for a 3.8% sales tax on the proceeds from your home if you sell it after 2012. The e-mail claims that all real estate transactions starting in 2013 will be subject to this 3.8% tax, that the tax was designed to hurt America’s retiring generation. Naturally, the e-mail created a bit of a stir; it’s not surprising people were concerned that they might lose a substantial chunk of the income from their recently sold home. However, Indianapolis real estate owners take heart: this rumor is absolutely not true.

That’s right: there is no “real estate tax” or “transfer tax” in the new health care bill. Instead, there’s a 3.8% Medicare tax for some (not all) higher income families. The original claim stemmed from an opinion piece that ran in the Spokesman-Review in Spokane, Washington, but the claim has since been discounted. Homeowners trying to sell their homes before 2013 need not worry: the tax only affects higher income tax brackets and even then only applies to a portion of your real estate revenue.

Video of NAR Director of Tax Policy Linda Goold explaining the supposed 3.8% real estate tax that’s been making the rounds of Indianapolis inboxes


Robert Freedman, the senior editor of REALTOR Magazine, explains the tax in this article posted on the “Speaking of Real Estate” blog: “For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income.” That still sounds like a little much, right? After all, 3.8% of $250,000 is still $9500. However, that’s where the bill’s “capital gain exclusion” provision comes into play. Freedman said “Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.”

Freedman then goes on to provide an example that will likely calm the anxious worries of Indiana residents looking to sell their homes: “Let’s take a look at a married couple that has $325,000 in adjusted gross income (AGI), plus $525,000 in capital gains from the sale of their house…Presumably, they bought their house years ago and it’s appreciated over the years, so upon selling it, their gain is a relatively high $525,000. For this household, only $25,000 in investment income would be subject to the 3.8 percent tax. That would amount to $950. That’s because it’s the $25,000 over the $500,000 capital gains exclusion that’s taxable.” There are other factors that come into play (such as the couple’s adjusted gross income), but its important to know the 3.8% tax only applies to a small portion of Americans, and it only affects a small portion of their income.

Much more information about the 3.8% Medicare tax can be found at the National Association of REALTORS’ Health Insurance Reform page, including a helpful brochure on tax strategies for REALTORS and those selling their homes. So if you receive an inflammatory e-mail harping about the dastardly new real estate tax imposed by Obama, don’t take it seriously. If the giant colored font and incendiary language of the e-mail didn’t tip you off immediately, the 3.8% real estate tax or “transfer tax” is a myth that you can send directly to the trash folder.

3.8% Real Estate Tax Links from REALTOR.org: