Obamacare affects real estate transactions
On June 28, the Supreme Court upheld the Patient Protection and Affordable Care Act informally referred to as Obamacare as constitutional under the federal government’s taxing powers. At this point, the law is essentially a done deal that will have far reaching effects on all Americans way beyond the scope of health care, including taxes that will have an effect on real estate transactions.
Beginning Jan. 1, 2013, a tax of 3.8 percent will be assessed on some investment income like interest, dividends, rental income and capital gains, which may include some real estate transactions. The purpose of the tax is to raise $210 billion to help fund the health care and Medicare over-haul representing about half of the total new expenditures.
About a month ago, I talked about the misrepresentation of this tax before we knew that it was going to be implemented. At that time I reminded everyone that this was not a 3.8 percent tax on every real estate transaction, which was the rumor circulating at the time, but rather a limited tax based on income and a variety of variables.
Now that we know the tax is almost certain to commence next year, everyone who owns real estate or is considering purchasing either personal use or investment real estate should be aware of the specifics. In an effort to educate their members and the public, the National Association of Realtors has published a brochure which is available on line explaining the law. Like any new tax law, it is important for you to consult with a tax professional before making any decisions, however, there are some basics to be aware of.
The first criteria that must be met in ordered to be required to pay this tax is an Adjusted Gross Income (AGI) of $250,000 or more for married couples or $200,000 for singles. For example, if a married couple with an AGI of $300,000 has a capital gain on the sale of their primary residence of $600,000 they would be required to pay 3.8 percent on $100,000 or $3,800. The first $500,000 of capital gains for a married couple selling their primary residence is exempt, and for single individuals the first $250,000 is exempt.
Second homes that are not used as rental properties do not have the benefit of a capital gains exemption. Therefore, the profit on the sale is added to your adjusted gross income, and tax would be due on the excess over the $250,000 income level for couples.
Commercial and investment property is a whole other calculation which involves depreciation recapture and needs to be determined by a professional. However, since most commercial and many investment properties are in the upper value ranges, adding a 3.8 percent capital gains tax on the profits could be substantial.
Whether you’re like approximately half of the country that agrees with the new mandate or half that does not is a moot point as it will affect many real estate sales, whether you like it or not. If you fall within the parameters outlined in the law, you will be subject to the additional unearned income tax or tax on the money you earn on your capital. Unfortunately, as we all know, taxes can be a slippery slope. Restrictions that are applicable in 2013 could easily be relaxed in future years encompassing more and more real estate transactions.