National sales tax on real estate - the myth

General Real Estate Investing
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Most of you guys probably know this. Some may not.

The other day I was listening to a national talk radio show, and some caller got on the radio complaining about the new 3.8% sales tax on real estate. And the host said he agreed, and they continued to rattle on about it. Of course this caught my attention.

I have researched this and I want to clear it up ---- there is NO national sales tax on real estate now, nor will there be in the near future unless a new law is written (which probably will not happen).

A sales tax is a tax on top of a transaction, regardless of profit margin. So theoretically if it were in place - and you bought your house for $125k and sold it for $100k at a $25k loss - you and/or your buyer would still pay $108,250 if the sales tax rate was 8.25%. THIS IS FALSE AND NOT THE CASE WHATSOEVER.

There IS a new tax of 3.8% on income above $200k if you are a single filer, or $250k if you are married / joint filer. This is designed to fund the national healthcare plan (which I personally think is dumb, but that is a whole other discussion). So you can buy & sell as many houses as you want, and not be subject to any 3.8% sales tax, BUT YOU WILL be subject to that 3.8% payroll-style tax on most (if not all) income above those 2 mentioned AGI thresholds.

And I have been told by an accountant that the tax regulation that says a couple can still take a $500k profit TAX FREE on a primary, non-investment home, will trump the $250k rule. But that is still up in the air, and subject to an IRS ruling/perspective.

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motivatedceo,
Thanks for checking that out. There is so much garbage being talked especially on the radio and internet, and people just buy into it without any discernment whatsoever.

I had heard that “what is the world coming to” story myself. There are rumor-mongers and the gullible everywhere.

Furnishedowner

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motivatedceo,

There is a lot of misinformation in circulation on this subject. Even the Tax Foundation blog incorrectly calls this tax a capital gains tax. I hope to add more clarity to the issue.

The new tax is really a combination of Medicare surcharges on earned income and on investment income (which also includes dividends, interest, and royalties) levied on high income tax payers. The total effect of all the proposed tax changes for the high-income earner totals 3.8%.

Under the current definition, a high income earner’s AGI is more than $200K if filing single or $250K if married filing jointly.

The first portion of the new medicare surcharge is a 0.9% increase in the medicare tax high income taxpayers will pay on earned income. Not quite sure whether the surcharge applies to all earned income or only that income that exceeds the high-income threshhold. We will know precisely when the employers tax guides are updated to reflect this new payroll tax.

The second part of the medicare surcharge is a 2.9% tax on investment income earned by the high-income taxpayer.

While I have no idea how the tax in investment income will be collected, I strongly suspect it will be collected on the 1040 as an additional tax on the total amount of investment income (reported on Schedule B, Schedule D, and Schedule E) provided the taxpayer’s AGI is over the $200K/$250K high-income threshhold.

Just as the medicare tax is applied to all earned income, I suspect the medicare surcharge will be applied to all investment income if the AGI qualifies the taxpayer as a high income earner.

This is only speculation for now, we will just have to wait to see whether the new Congress changes or repeals this part of the law, and how the IRS implements it.

For the time being, the profit on the sale of a homeowner’s primary residence that qualifies for exclusion under Section 121 will not be subject to the new Medicare surcharge. As far as I know, this question is not “up in the air” and there is no IRS ruling pending on this question.

This new tax on investment income does not even go into effect until 2013, so Congress could still tinker with the concept and change the rules some more.