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What About the New 3.8% Tax?

In an effort to clarify and help dispel rumors regarding the new 3.8% Sales Tax for Real Estate, N.A.R. has published an article with details how the tax will be applied. Below is an excerpt with some basics for you to know.

Beginning January 1, 2013 a new 3.8 percent tax on some investment income
will take effect and will affect some real estate transactions; it’s a complicated tax and you will want to consult your own tax preparer for complete information & advice.

Who it Applies To:

  • Individuals with adjusted gross income (AGI) above $200,000
  • Couples filing a joint return with more than $250,000 AGI
  • Types of Income: Interest, dividends, rents (less expenses), capital gains (less capital losses)

Formula Used:

  • The new tax applies to the LESSER of
  • Investment income amount
  • Excess of AGI over the $200,000 or $250,000 amount

EXAMPLE:
Capital Gain: Sale of a Principle Residence
John and Mary sold their principal residence and realized a gain of $525,000.
They have $325,000 Adjusted Gross Income (before adding taxable gain).

The tax applies as follows:
AGI Before Taxable Gain $325,000
Gain on Sale of Residence $525,000
Taxable Gain (Added to AGI) $25,000 ($525,000 – $500,000)
New AGI $350,000 ($325,000 + $25,000 taxable gain)
Excess of AGI over $250,000 $100,000 ($350,000 – $250,000)
Lesser Amount (Taxable) $25,000 (Taxable gain)
Tax Due $950 ($25,000 x 0.038)

NOTE:
If John and Mary had a gain of less than $500,000 on the sale of their residence,
none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax
would depend on the other components of their $325,000 AGI.

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