Blog Post by Mark W. Siler.
The short answer to the question above is no. The confusion on this topic began a little over a year ago when a few political blogs picked out a complicated section of the Patient Protection Affordable Care Act (PPACA) and made a very simple (and incorrect) interpretation of it. This interpretation became more widespread when more blogs and political websites latched onto the story and a chain email was generated and circulated discussing a “3.8% Real Estate Sales Tax.” The claims made in the email have been clarified in numerous articles and blog posts over the past year; however a new chain email espousing the sales tax myth is making the rounds (a client recently sent the latest version to us). I am adding my blog post to the chorus of publications attempting to clarify the status of the law.
There is no real estate “sales tax” in the PPACA. The law does contain a new 3.8 percent tax on unearned income for taxpayers exceeding a certain income level beginning in 2013. The unearned income subject to this new tax includes capital gains income. The gain on the sale of a home is capital gains income. This progression is the genesis for the claim that the law implements a 3.8 percent sales tax on the sale of a home. However, for the new tax to impact you, you must be an individual with an adjusted gross income of $200,000 or more or a married couple with an adjusted gross income of $250,000 or more. Next, if the real estate being sold is the your primary residence, the capital gain on the sale must exceed $250,000 for an individual or $500,000 for a married couple due to the exclusion of gain on the sale of a primary residence available to all taxpayers. Note that the amounts in the previous sentence are the capital gain (meaning the sale price of the home less the amount you paid for the home and the amount of any improvements you may have made to the home), not the overall sale price.
Let’s look at an example. Take a married couple with adjusted gross income of $300,000 in a year and living in a house they bought for $500,000. If they sell that house for $900,000, the new unearned income tax will have no impact on the couple because, even though they exceed the adjusted gross income threshold, the gain of $400,000 on the sale of the couple’s primary residence (the $900,000 sale price, less the $500,000 they paid for the home) is less than the $500,000 exclusion. Therefore, the couple has no capital gain income on the sale of the home. If the couple sells the house for $1.1 million, the capital gain on that sale will be $600,000. However, due to the exclusion for the sale of a primary residence, only $100,000 of the capital gain is capital gain income and will be subject to the 3.8 percent tax. Therefore, in our example, a total of $3,800 would be due on the sale of a home for $1.1 million.
There are a couple of caveats to keep in mind. First, for people who own second homes or investment properties and are above the income thresholds, the tax will apply to gain generated by the sales of those homes or investment properties. This is because the gain on those sales is not covered by the capital gain exclusion applicable to the sale of a primary residence. Again, this only applies to the gain, not the entire sale price of the real estate. Second, the income thresholds in the law are not indexed to inflation, nor are the capital gain exclusion amounts contained in the principal residence exclusion. Therefore, over time, as home prices and incomes increase, more people will be impacted by this law.
Overall, the healthcare reform law does not implement a real estate sales tax. The law does implement a new 3.8 percent tax on unearned income beginning in 2013 which will include capital gain income on the sale of real estate. However, due to income thresholds contained in the law and the exclusion of gain on the sale of a primary residence already in place, the new tax will impact a very small percentage of home sales in the near term.