BombleFact: Does HCR Impose a new 3.8% Tax on Home Sales?

I recently got an email asking if President Obama’s Health-care law imposes a new 3.8% tax on home sales

Here is the text:

IF YOU OWN A HOME, PLEASE READ THIS

The National Association of REALTORS is all over this and working to get it repealed, before it takes effect. But, I am very pleased we aren’t the only ones who know about this ploy to steal billions from unsuspecting homeowners. How many REALTORS do you think will vote Democratic in 2012?

Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? That’s $3,800 on a $100,000 home, etc. When did this happen? It’s in the health care bill and goes into effect in 2013.

Why 2013? Could it be to come to light AFTER the 2012 elections? So, this is “change you can believe in”? Under the new health care bill all real estate transactions will be subject to a 3.8% Sales Tax.

If you sell a $400,000 home, there will be a $15,200 tax.
This bill is set to screw the retiring generation who often downsize their homes. Does this make your November and 2012 vote more important?

Oh, you weren’t aware this was in the Obamacare bill? Guess what, you aren’t alone. There are more than a few members of Congress that aren’t aware of it either.

I hope you forward this to every single person in your address book. VOTERS NEED TO KNOW!!!!!

So, is it true? While it is loosely based on a factual and logical interpretation of the law’s potential tax effects, it is not true that it will apply to all home sales.

The tax is not a tax on home sales, per se, but it can apply to the sale of homes. If you’re familiar with the 15% capital gains tax, this is essentially a new additional 3.8% capital gains tax for some wealthier individuals, small business owners, and folks who have seen their property values skyrocket.

Starting next year in 2013, the new tax will apply to those making $200,000 a year ($250,000 for married couples filing jointly). Essentially, it is a revenue raiser that will make the capital gains rate 18.8% in some cases.

How could it apply to home sales? When an individual sells their home for a profit, the money they make over their initial buying price is a capital gain. Tax law does provide for a $250,000 per-person ($500k if you’re married and filing jointly) exclusion for the capital gain for primary residences. Vacation and secondary homes are subject to the new higher capital gains tax with no $250k exclusion. Important to note this applies to the capital gain, not the value of final sale, like the email infers. Capital gains taxes are levied on gains.

So, to say this applies to all home sales is just plain false. But it will apply to some home sales, including individuals that aren’t necessarily very wealthy, like people who moved into an area that has seen home values skyrocket and move when they’re older.

How it might apply:

  • A single guy making $200k a year in New York City sells his weekend home (not primary residence) for a $45,000 gain.
  • A married couple in Phoenix sells their primary residence that they bought 40 years ago that has gone up in value from $40,000 to $2.6 million because the city has grown outward and driven their property values higher.

Another factor to consider is that median home prices aren’t terribly high (most homes are under $200k), not to mention that a large amount of people have lost value in their homes due to the recession. The likelihood of a massive capital gain on the sale of a primary residence (above the $250k per person exemption) is not very likely.

More to the point, the law is likely to raise taxes on small business owners’ capital gains, and it will also apply to wealthy individuals (like Warren Buffett who wants a tax increase) who get much of their income through capital gains. The new tax will apply to high-income earners for interest, dividends, capital gains, annuities, and rents.

I personally don’t think this is good tax policy, but it’s worth pointing out that much of what is being said about it is false.

Ruling:

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