Beginning January 1, 2013, a new 3.8% tax on some investment income will take effect. The tax was passed by Congress to help fund the health care and Medicare overhaul.
Recently, we have been receiving multiple inquiries regarding the new 3.8% capital gain tax and what impact it will have on residential real estate transactions. The good news is that the new 3.8% tax will not apply to a majority of residential real estate transactions in our region. However, the new tax will affect some residential real estate transactions, thus it will be important for realtors to clearly understand the tax and the impact on clients.
The new 3.8% tax law will apply to individuals with an adjusted gross income (AGI) above $200,000.00, and couples filing a joint return with more than $250,000.00 AGI. With regard to the sale of a primary residence, the tax will not apply to the first $250,000.00 on profits gained by an individual, and the first $500,000.00 on profits gained by couples filing a joint return. Please note that the $250,000.00 (individual) and $500,000.00 (couple) primary residence exemptions will not apply to second homes or investment properties. In other words, there is no exemption from the sales tax for residential transactions involving second homes or investment property, and the tax will therefore be due for any such transaction if the income thresholds are exceeded.
- The 3.8% tax will NEVER be collected as a transfer tax on real estate of any type, thus the tax will NEVER be paid at the time of purchase.
- The tax will not be applied until the 2013 Form 1040 tax return is filed in 2014. The 3.8% tax for any later year will be paid in the following calendar year when the tax returns are filed.
Please note, the above is only a brief overview of this very complex tax and it will be difficult to predict exactly how it will affect each individual. Thus, we recommend that any real estate professional advise their clients to contact their local tax professional with any specific inquiries they may have regarding the new 3.8% tax.
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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