BLOG: New 3.8 Percent Transfer Tax on Real Estate, Fact or Fiction?

The internet provides a wealth of information all just a click away, but sometimes the data is not completely accurate as is frequently the case with emails which are written to elicit outrage or response and then forwarded on without first checking the facts.

I’ve received a few of those emails and the related questions throughout the past few months regarding the new 3.8 percent transfer tax that is part of the Affordable Health Care Act (AKA Obamacare).

Nothing gets people in a huff quicker than the word tax and especially when it’s tied to their homes. So now that the U.S. Supreme Court has upheld the health care legislation and all of its major provisions will remain in effect, it might be a good idea to get the word out about this tax and how it might affect you.

As with many new taxes, this one is targeted toward upper-income taxpayers.  The 3.8 percent tax is imposed ONLY on those with an adjusted gross income of more than $200,000 (individual) or ($250,000 on a joint return).

The tax applies specifically to investment income which is defined as interest, dividends, capital gains and net rents. The capital gains and rental income would both come from owning real estate.

These items are all included in an individual’s adjusted gross income when filing taxes. Under the new law, a formula will determine what portion, if any, of these types of investment income would be subject to the tax.

The tax is NOT a transfer tax on real estate sales and similar transactions. 

Not long after the bill was passed including this new tax, erroneous and misleading documents went viral on the internet and created a great deal of misunderstanding, outrage and hysteria.

The new tax will NOT eliminate the current benefit of the $250,000 (individual)/$500,000 (joint) capital gains exclusion on the sale of a principal residence. The new tax would only come into play if your gain was above those thresholds.

Not to say that a new tax is a good thing (it isn’t), but understanding how it works is important. So if you have an adjusted gross income of more than $200,000 per year and own investment properties, you might want to consult with your tax adviser.

For everyone else, these new changes probably won’t affect you.  But if ever in doubt, always ask a qualified professional like a CPA. 

The new tax law goes into effect in 2013.