3.8% new tax on all Real Estate Transactions is not true

Friday, January 27, 2012

Effective January 1, 2013, a new 3.8 percent tax on some investments is slated to affect real estate transactions.

The is a complicated tax and while I’m not a tax accountant, here are the basics:

The 3.8 percent tax passed by Congress in 2010 won’t affect all real estate purchases.
The tax may be applied to income from interest, dividends, rents (less expenses) and capital gains (less capital losses) for individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI.
The new tax applies to the lesser of 1) investment income amount 2) excess of AGI over the $200,000 or $250,000 amount.

One Example:
Let’s say you are married and have $300,000 in adjusted gross income (AGI) and sold your principal residence for a $600,000 gain. $500,000 of the $600,000 is the standard deduction for a married couple.

The Math:
AGI Before Taxable Gain $300,000
Gain on Sale of Residence $600,000
Taxable Gain (Added to AGI) $100,000 ($600,000-$500,000, standard deduction for married couple)
New AGI $400,000 ($300,000+$100,000)
Excess of AGI over $250,000 $150,000 ($400,000-$250,000)
Lesser Amount (Taxable) $100,000 ($100,000 is less than the $150,000 so taxable gain is on the $100,000)
Tax Due $3,800 (.038 x $100,000)

Watch out for the chain emails stating this is a tax on all real estate transactions, because that info is false.

This new tax is supposed to raise $210 billion (over 10 years), representing more than half of the total new expenditures in the health care reform package. I support the National Association of Realtor which strongly objected to this tax, but the legislation passed on a largely party line vote.

For questions about how this affects your sale in Steamboat Springs, Colorado real estate purchase, contact me.

Dean Laird
Colorado Group Realty Broker/Owner
dean@mybrokers.com
970-846-8284

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