Real Estate Urban Legend

Nothing can be more frightening than the threat of an additional tax on real estate sales. In New Jersey, sellers already pay a Realty Transfer Tax on every residential closing. Soon after Obama’s Health Care Legislation passed, a rumor started that carefully tucked into the bill was a 3.8% Medicare tax, payable by sellers, on all real estate transactions. I got this forwarded to me so many times, I started to think it was true. Can sellers bear any more disappointment and loss of equity  when selling their home?

I looked into it further, and the emails were a blend of true and untrue information.

The origin of the myth is one of the provisions of the recently passed Patient Protection Affordable Care Act. The health care legislation calls for high-income households to be subject to a new 3.8% Medicare tax on investment income starting in 2013. The PPACA creates a new code section which will impose a 3.8% tax on the lesser of “net investment income” or the excess of modified adjusted gross income over a threshold amount. This applies to interest, dividends, annuities, royalties, rents, income from passive activities and the disposition of property. It is meant to be a tax on investment income. The threshold amounts currently are $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 in all other cases.

The rules of capital gains exclusion also defines another threshold pertaining specifically to the sale of one’s primary residence– profit exceeding $500,000 for a couple and $250,000 per individual will fall into the 3.8% Medicare tax obligation. That’s why it’s referred to as the “high earner tax”.

Most people who sell their homes will not be impacted by these new regulations. Unfortunately, most sellers are not making a substantial profit, if any profit at all, so they will not even be made aware of this tax liability.

The bill’s definition of high earners encompasses about 5% of all taxpayers. Since the median sales price of existing single family homes nationally was $170,700 in March 2010, the Medicare tax will likely affect only a small percentage of home sellers when it is implemented in 2013.