A number of clients have contacted our office, saying they heard the Obama Health Care bill imposes a 3.8% sales tax on all real estate sales. This is a myth that was created by a conservative columnist who incorrectly stated that the health care bill imposes a 3.8% sales tax on all real estate.
A provision of health care legislation calls for high-income households to be subject to a new 3.8% Medicare tax on investment income starting in 2013. Generally it is 3.8% tax on the lesser of "net investment income" or the excess of modified adjusted gross income over a "threshold amount" (generally, $250,000 for taxpayers filing a joint return, $125,000 for married taxpayers filing a separate return and $200,000 in all other cases).
Net investment income generally means the excess of (i) interest, dividends, annuities, royalties, rents, income from passive activities, income from trading financial instruments and commodities, and gain from the disposition of certain nonbusiness property, over (ii) allowable deductions properly allocable to such income. In determining the amount of net investment income, special rules apply with respect to dispositions of equity interests in certain partnerships and S corporations, and to distributions from certain qualified plans. This additional tax applies to taxable years beginning after December 31, 2012
This Medicare tax is not a sales tax that applies to all real estate transactions; it is a tax on investment income that could result in a very small percentage of home sellers (i.e., those defined as "high earners") paying additional taxes on home sales profits over a designated threshold amount.
As a simple example, if a couple with a combined income of over $250,000 per year decided to scale back by selling their large $2 million residence in favor of a smaller home, and they made a $750,000 profit on the sale, they would have to pay an additional 3.8% tax on $250,000 (i.e., the $750,000 profit minus the $500,000 capital gains threshold), for a total of $9,500.
Given that the median sales price of existing single-family homes in the U.S. was $170,700 in March 2010, and that about 1.5% of all households in the U.S. have incomes of $250,000 or above, the Medicare tax will likely affect only a small percentage of home sellers when it is implemented in 2013.