Thursday, July 29, 2010


While I was in Austin a client sent me an email asking about the new “real estate sales tax” that he and the Mrs would have to pay if they sold their home. The email included the following, which he had received in a forwarded email -


Under the new health care bill - did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don't kick in until 2013 (presumably after Obama’s re-election). You can thank Nancy, Harry and Barack and your local Democrat Congressman for this one. If you sell your $400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Is this Hope & Change great or what? Does this stuff makes your November and 2012 votes more important?

Oh, you weren't aware this was in the Obamacare bill? Guess what, you aren't alone. There are more than a few members of Congress that aren't aware of it either (result of clandestine midnight voting for huge bills they’ve never read). AND, there are a few other surprises lurking

A real estate sales tax? Poppycock!

Here is the real story –

Beginning in tax year 2013 there will be an additional 3.8% Medicare surtax on the lesser of –

(1) Net investment income, or

(2) Modified Adjusted Gross Income (MAGI) in excess of $250,000 on joint returns and $200,000 for single filers.

The surtax is on taxable income and not gross proceeds. If you sell your principal personal residence you can exclude up to $250,000 of the gain ($500,000 on a joint return) if you owned and lived in the residence for 24 months during the 5-year period prior to the sale. If 100% of the gain from the sale of a personal residence is excluded from tax under this rule then there is no taxable income on which to pay the 3.8%.

In the above example if the $400,000 home that is sold qualifies as the taxpayer’s principal residence for purposes of the exclusion the additional tax would be “0” if the taxpayer is married and filing a joint return – because of the $500,000 exclusion there is no taxable income. There would only be an additional tax if the taxpayer’s exclusion was limited to $250,000 and the basis of the home sold (original cost + capital improvements + closing costs on purchase and sale) was less than $150,000 and his/her modified AGI was more than $200,000 – but this would be no where near $15,200.

There would be a possible 3.8% surtax liability on any gain from the sale of any vacation, rental or investment real estate. But again the tax would only apply to the net taxable gain if MAGI exceeded $200,000 or $250,000 – and not the gross sale price.

The only truth in the above nonsense is the fact that the additional taxes do not kick in until 2013 – after the next Presidential election.

My client did the right thing. Upon receiving this totally false information from someone other than a competent tax professional he contacted me and was told the truth. As I am constantly writing and saying – NEVER ACCEPT TAX ADVICE FROM ANYONE OTHER THAN A PROFESSIONAL TAX PREPARER.

FYI – if you don’t believe me addressed this issue back in April. Click here.


1 comment:

Carrie #K said...

Maybe they know someone in CA who had state tax withheld on their real estate sale. (Scroll down a bit to the instructions). I have no idea why CA did that, they've had to refund all of it that I know of, but maybe they just wanted to hang onto it for a bit? Form 593