The Supreme Court’s healthcare reform law created a wave of rumors regarding a 3.8% real estate tax on the sale of homes beginning in 2013. Many are wondering if this alleged “transfer tax” is true, false or otherwise. The new 3.8% surtax that takes effect on January 1, 2013 could impact certain real estate transactions, but it’s not overarching and isn’t likely to affect the majority of people who sell their homes next year.
For those with an adjusted gross income of less than $200,000 as a single filer, or $250,000 for couples filing together, you likely won’t be affected. And those with an income higher than these numbers could dodge the 3.8% surtax too, especially if your income is solely earned. Those with dividends, interest, net capital gains, and net rental income that are targeted by the new law need worry the most.
One unique situation to be aware of is for those with an AGI above the $200,000 and $250,000 thresholds who sell their home for a substantial profit. You will still be able to take advantage of the first $500,000 (joint filers) or $250,000 (single filers) in tax-free gains on the sale of your principal home; however, any profit above these limits could subject you to the 3.8% surtax.
Because of the changing laws, it will more important than ever to keep a good paper trail of documentation regarding capital improvements, house expenses, settlement or closing costs, title insurance and legal fees, etc. All of these items increase your tax basis and help lower your capital gains. The best way to determine if you’re liable for the 3.8% surtax is to speak with a tax professional regarding your specific situation.