Rumors of 3.8% ‘Transfer Tax’ for Medicare is Misleading.
No matter which side of the political fence one resides, we can all agree that it is important to recognize facts from campaign smears. Once again, emails are going viral in regards to a rumor that President Obama’s passed health care bill contains a 3.8 percent ‘transfer tax’ on homes sales. Within these emails, it is noted that the National Association of REALTORS® is working to fight this tax. Quite frankly, once again as REALTORS®, we want to point out that these claims are WRONG! Here’s the real ‘skinny’ from the National Association of REALTORS® (via the South Tahoe Association of REALTORS®):
To sum it up: The health care bill included a provision that imposes a new 3.8 percent Medicare tax for some high-income households that have ‘net investment income.’ Any revenue collected by the tax is dedicated to the Medicare hospital insurance program. This new tax applies only to households with Adjusted Gross Income (AGI) of more than $200,000 for individuals or more than $250,000 for married couples. Since capital gains are included in the definition of net investment income, an additional tax obligation might result from the sale of real property.
There are two major factors in figuring out the tax, however, which is complex. Keeping in mind that the new 3.8 percent Medicare tax is assessed only when the $200K/$250K AGI limits are exceeded, the amount of net investment income subject to tax is the LESSER of 1) total net investment income OR 2) the excess of AGI over the $200K/$250K AGI limits. Even when the AGI limits are met, however, the new tax would not be applied to capital gains that result from the sale of a home, since the existing home sale capital gains exclusion rule still applies $250,000 (individual)/$500,000 (couple). So if the gain from the sale of the primary residence is below that amount, then NO Medicare tax will have to be paid on the gain. The new Medicare tax would apply only to a home sale gain realized in excess of the $250K/$500K that pushes the filers AGI over the $200K/$250K income limits.
Some other quick points:
* There is no such exclusion for the sale of a second home.
* The new Medicare tax will take effect January 1, 2013.
* The legislation makes no changes to the mortgage interest deduction.
N.A.R. has posted a detailed Q&A on this issue and on the new health care bill. The Q&A will be updated as other provisions are developed. To access the FAQ, please click here:
NAR also has a brochure entitled “The 3% Tax – Real Estate Scenarios & Examples.” If you are interested in receiving a copy of this brochure, just let us know. We would be happy to send one your way.