As clarification to the 3.8% Home Sales Tax information shared in yesterday’s Cup O’ Joe, please consider the following points presented by Brooks Jackson:
- Under the recently enacted Healthcare Law, a 3.8% tax on net investment income of persons earning “net taxable income” of over $250,000 ($500,000 if married filing jointly).
- The tax doesn’t apply to the first $250,000 in profits from the sale of a personal residence, or the first $500,000 if married filing jointly.
- It applies only to the “net gain” from a sale, which means the property must be sold for more than what it was worth for the tax to apply.
- The tax will apply to a second home or principal residence sale generating more than $250,000 in profit, (Or, $500,000 for married couples filing jointly.)
- To qualify for the exemption above, the seller must have lived in the home as the “main home” for at least two out of the last five years prior to the sale.
Jackson gives two examples of who this tax would apply to are as follows:
- A single executive making $210,000 a year who sells his $300,00 ski condominium for a $50,000 profit. The tax on the sale of this vacation home would amount to $1,900.00 in addition to any capital gains due.
- An “empty nester” couple with combined income of over $250,000 a year who sell their $1 million primary residence to downsize. If they cleared $600,000 on the sale, they would be taxed on $100,000 of the profit and would pay $3,800 over and above the 15% capital gains tax.
A couple of things to keep in mind about the above examples, however, are as follows:
- If the “empty nesters” above were selling their beach house for a $600,000 profit, they would be paying 15% capital gains tax on the sale plus and additional 3.8% to help fund Medicare. this would raise the actual tax to 18.8%, still not a dramatic increase.
- Also, keep in mind, that the capital gains rate wasn’t always just at 15%. Capital gains tax used to duplicate the ordinary income tax rate and has been as high as 45% in past years. This is a key point for sellers of expensive homes in resort areas such as Coastal Florida and The Jersey Shore to keep in mind.
In these trying times of massive deficit spending, the government is likely to find itself in a positions to explore all options to reduce debt. One need only look at the impact of deficit spending in Europe to evaluate the potential risk the United States faces. The question that every prospective seller must ask themselves, is:
” If I keep my home until after the elections,
how will future changes in tax laws impact the net proceeds I receive from the sale of my home?”
Our responsibility as Trusted Real Estate Advisors is to help our buyers and sellers manage their risk by