Is the 3.8% Tax on All Real Estate Sales Correct?
The short answer is no. While you may have seen the emails or editorial pieces that are floating around the internet which state the contrary, there are some key facts missing. While this tax will apply to some home sales starting January 1, 2013 it is only for a small group of people. Those with an AGI of $200,000 individually or $250,000 if filling jointly qualify for the additional 3.8% tax. The tax will only apply to the amount above the $200,000/$250,000 income limits. And with that, the tax won't apply to the first $250,000 of profits from the sale of a primary residence or $500,000 if a married couple.
With the convoluted nature of tax code it is easy to see how this rumor got started, especially in our market. In the Vail Valley we probably will have a higher rate of people this tax effects because of the higher incomes and non-primary residence homeowners. Another thing to remember is that this is not a tax solely on real estate transactions, it covers all investment income.
Here is an example...If AGI for an individual is $275,000, the excess over the threshold of $200,000 is $75,000. This person also has a net investment income of $60,000. The new tax only applies to the lesser of the two amounts, so they will pay the 3.8% tax on the $60,000.
You will need to be aware of your personal situation and possibly talk with your accountant about what tax ramifications you may encounter when selling your home if you anticipate a profit. As always, feel free to contact me with any questions you may have or to refer you to a few real estate lawyers or accounts that can help you out.