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Does Health Care Bill Contain 3.8% Home Sales Tax?

As the states and the new Congress renew the debate about the Administration’s Health Care Bill, we are again getting many questions about a possible 3.8% tax on home sales that some claim is in the bill. To answer these questions, we have decided to re-run a blog post we did last year. – The KCM Crew

We have received many questions about a possible 3.8% tax which will be put on home sales beginning in 2013. We want to do our best to clarify this situation for everyone. We are not accountants and give you this information just as a simple answer to the misconception. Understand that, when it comes to IRS regulations, you should check with your accountant for the most accurate and up-to-date information.

A little history on the confusion

Fact Check.org explains it this way:

The truth is that only a tiny percentage of home sellers will pay the tax. First of all, only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it. And even for those who have such high incomes, the tax still won’t apply to the first $250,000 on profits from the sale of a personal residence — or to the first $500,000 in the case of a married couple selling their home.

We can understand how this misconception got started. The law itself is couched in highly technical language that only a qualified tax expert can fully grasp. (This provision begins on page 33 of the reconciliation bill that was passed and signed into law.) And it does say the tax falls on “net gain … attributable to the disposition of property.” That would include the sale of a home. But the bill also says the tax falls only on that portion of any gain that is “taken into account in computing taxable income” under the existing tax code. And the fact is, the first $250,000 in profit on the sale of a primary residence (or $500,000 in the case of a married couple) is excluded from taxable income already. (That exclusion doesn’t apply to vacation homes or rental properties.)

The Joint Committee on Taxation, the group of nonpartisan tax experts that Congress relies on to analyze tax proposals, underscores this in a footnote on page 135 of its report on the bill. The note states: “Gross income does not include … excluded gain from the sale of a principal residence.”

And just to be sure, we checked with William Ahern, director of policy and communications for the nonprofit, pro-business Tax Foundation. “Some home sales would see a tax increase under this bill,” Ahern told us, “but it would have to be a second home or a principal residence generating [a gain of] more than $250,000 ($500,000 for a couple).”

Simple Explanation: 

The following simple explanation comes from midiShaw:

The tax will affect those sellers of real property who will be otherwise taxed on capital gains under current tax laws. Under current laws, if you sell your primary residence and meet the ‘time ‘ criteria, you are exempt up to $250,000 or $500,000 (filing individually or jointly).  Any amount realized OVER that amount is taxable under current tax schedules based on income.  As such, this new tax will apparently be added to the current capital gains tax burden IF your income is over $200,000/$250,000 (filing individually or jointly). For those selling second homes and investment properties, the tax, once again, will be applied to the amount of gain realized.

Detailed Explanation:

The following also comes from midiShaw in a comment to the above answer.

Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under the law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.” In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 1221 (capital gains), as well as gains on other property that are considered part of ordinary income.

We offer this just as an explanation. Remember, when it comes to IRS regulations, you should check with your accountant for the most accurate and up-to-date information.

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16 replies
  1. leslie
    leslie says:

    The way I read the explanation is that if you are married and file jointly have a $500,000 gain on your house and you make more than $250,000 in income you will pay capital gains on the profit of your sale after the $500,000 allowance. So if you are making $250,000 joint income and make over a $500,000 profit on your home,congratulations.Stop scaring seniors-they won’t be making that much!!

  2. Richard A. Weaver
    Richard A. Weaver says:

    Another government sneek , dishonest slimmy game! What is an IRS tax issue doing buried in a health care bill? Explanation is not necessary, they are gutless sick slimballs!

  3. Bob
    Bob says:

    “Explanations” are lost on cynics like you (people who blame the government for all that is wrong in life). By the way, you might want to check your spelling on “slimmy”, “slimballs”, and “gutless” ….
    The people who will end up paying this modest (at least for them) are all doing quite well! (far better than the government is doing) … they can afford to chip in a small percentage of their income to help pay for people who are far less fortunate …

    • TheOne
      TheOne says:

      “they can afford to chip in a small percentage of their income to help pay for people who are far less fortunate …”

      I am one of “they”! I should pay for someone elses stuff??? The percentage does not matter. That I would be forced to pay, is the issue. And what IS a sales tax of ANY kind, doing in the middle of a health care bill?? You can keep the ‘change’ this idiot promised us.

    • Byrdie
      Byrdie says:

      Jane, middle class income varies depending on where you live.  In some major metropolitan areas on the east or west coast, $200,000 annual salary may qualify you to purchase a ‘middle class’ home or condominium.

      Regardless of the dollar amount, taxing the ‘American Dream’ is leftist fascism.

  4. Robertfirebaugh
    Robertfirebaugh says:

    It’s very simple how to handle this….first …go to the polls and vote…..whoever is in office ….vote them out on every level of government…..no exceptions……it’s time these people in office WAKE UP……and have a little bit of common since

    This would solve the problem

  5. Tax Gem
    Tax Gem says:

    So, we are going to get a tax on house sales with a few ‘excepts’.  So what else will some  ‘demoncrats’ or any politician try next-tax for kids on any real property sales.  How about all profits on any sales goes to the government?  WHAT NEXT?????

  6. Earn it - Dont Steal It!
    Earn it - Dont Steal It! says:

    Lets see, the Government who is forcing us all to buy something that we might or might not want (key word is force), then stealing from others (lets not sugar coat this, its stealing) from those that might have more than us in a nation that has the greatest opportunity’s in the world. Because they want to give someone that might have less, well I am sorry, stealing others peoples money no matter how you sugar coat it is still theft. This is classic socialism. No thanks.
    If you make over $30,000 a year in this country, you are in the Worlds TOP 1% of wage earners. We all all rich!


Trackbacks & Pingbacks

  1. […] a brochure with more information on who is impacted and it is available on REALTOR.org and Steve Harney also has a very good explanation on his […]

  2. […] is not taxable under this law, nor are expenses that would directly impact the profit line.  Here is a link to an explanation that seems fairly […]

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