Among the most common tax and housing policy questions we field here at NAHB is whether a 3.8% sales tax will hit home sales in 2013.
The answer is no.
Unfortunately, we’ve been tracking a set of emails that falsely claim that the 2010 health care reform legislation (which contained a burdensome 1099 reporting requirement, now repealed) imposed a 3.8% sales tax or transfer fee on all home sales in 2013. There is an element of fact underlying this rumor, but for the most part this claim is false.
The new tax added by the health care reform law is an add-on to existing taxes on capital gains and other “unearned income” (dividends, rents, and interest). The new 3.8% tax is often referred to as a Medicare tax because its revenues will be dedicated to the Medicare Trust Fund.
For capital gains, presently taxed at a 15% rate, the gains rate would rise an additional 3.8 percentage points for high-income taxpayers, those with adjusted gross incomes (AGI) above $250,000 ($200,000 if filing a “single” return). Capital gains arise with the sale of capital assets, such as stocks, bonds, and real estate.
But importantly for home sales, the existing $500,000 / $250,000 gain exclusion for a seller of a principal residence continues to apply, so most principal residences sales will not be affected. Some second home sellers with high incomes may have to pay some additional capital gains tax to the extent that their AGI exceeds $250,000, but only on that portion of the gain that causes the taxpayer’s AGI to exceed $250,000 and only for the realized capital gain - not the actual sales price.
Consider the following, typical example. Suppose a married couple sells their principal residence for $500,000, after having purchased the home for $200,000. Suppose the capital gain on the sale is $300,000. The couple is allowed (under Section 121 of the Internal Revenue Code) to exclude from all tax (including the standard capital gains tax and the new 3.8% tax) up to $500,000 of gain, so there is no tax on the realized $300,000 gain from the home sale.
To be clear, the 3.8% tax is not in any way a sales tax paid against the sales price of the home for either the home seller or home buyer. Nor is it an additional business income tax for home builders selling a new home out of inventory.
The housing market has enough policy uncertainties today. We hope this false rumor concerning a 3.8% sales tax on home sales is not among them.