Urban myth or not? Obama’s 3.8% real estate tax

A real estate closing takes about 1.5 hours, if it’s perfect. This being real life and all, many of them take much longer.

As we sit waiting for word from the lender that all is well and that we can disburse, we talk about the Bears, about how the White Sox caved, then we cover details of when the client is moving, how much he paid for his POD, and after about two hours, we all go blank, stare at each other and check our phones incessantly.  Mercifully, we rarely touch the third rail: politics.

When all small talk is exhausted, invariably, someone says “well, next year you won’t be able to sell any real estate because Obama put that 3.8% tax on all real estate.”

After hearing this for about the 800th time yesterday, I did some detective work. I went to Snopes.com, which is an awesome site that tells us whether a “fact” is an urban myth or not.

Here’s the truth on the 3.8% real estate tax from Snopes.com:

Does the 3.8% tax apply to all real estate sales?

No, it will apply to very few people, probably less than 2% of the population. Also, this only applies if you have a big gain on the sale of your real estate and that knocks about almost everyone since we have had no gains on real estate since the late 1990s. Those who bought their homes in the 60s, 70s or 80s and who also have huge incomes might have to pay the tax. The masses will pay no 3.8% tax.

What income levels does it apply to?

First, your income has to be above $200,000.00 if you are single or if you are married, above $250,000.  If you make less than those amounts and sell real estate, you pay nothing.  The tax is not on the sale of real estate, but in the investment income produced by the sale of real estate.

I sold my home for a large gain and have a salary of $200,000, so what would I owe?

Let’s say a single guy sells his house for $600,000 and he paid $300,000 for the house, so his gain on the house is $300,000.  He can exclude $250,000 of profits on real estate under the law already, so that is subtracted and he has a gain of $50,000. Stick with me here, this is convoluted stuff.

The 3.8 tax would apply to the LESSER of:

  1. The amount that single guy’s income exceeds $200,000, or;
  2. The amount of taxable income (in this case $50,000) gained from the sale of single guy’s home.

Clear as mud, eh? Suffice it to say, this will apply to very few folks.

 

 

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