A New 3.8% Tax on Real Estate?

Now that's a scary thought!

The real estate industry has been in a buzz lately about a new proposed tax to be levied on home sales to help fund Medicare. There has been some confusion over the qualifications on this new tax which has lead to some strong outcry against it.

Homes in Pennsylvania are already taxed a 2% transfer tax (even higher in Philadelphia!) which is typically paid half by the buyer and half by the seller. Sellers also have to pay a percentage of the sales price to the listing agent and selling agent. Adding ANOTHER percentage tax on top of these would make it even more fiscally difficult to sell a home.

HOWEVER, the good news is that this tax is not going to affect every sale. In fact, it will really only affect a very small number of transactions. The tax will only affect approximately 2-3% of home sales. These sales would come from high-income households that realize a substantial gain on the sale.  

To qualify for the tax, a homeowner would have to realize a $250,000 gain on the sale of his house, or a couple would have to realize a $500,000 gain on the sale of their house. That is purely profit, not the sales amount. So if the Smiths bought a home for $500,000 and 10 years later sold it for $1,100,000, they’ve had a gain of $600,000 and that $100,000 over $500,000 could be taxed.

HOWEVER, there is another stipulation. To qualify for the tax, you must realize a gain and ALSO come from a high-income household. For a single person that amount would be $200,000 per year, or for a household it would be $250,000.

Thus: if the Smiths jointly file an income of $220,000 per year, they would not be taxed on the extra $100,000 over the $500,000 gain they saw on the sale of their house. If the Smiths file an income of anything over $250,000, however, that gain would be taxed.

This tax is set to go into effect in 2013, but no money would be taxed until 2014 (for gains realized in 2013). It is not just strictly a real estate tax, so the tax is not collected with the sale but at the end of the year. The tax covers all “unearned income.”

So, realistically, only a very small percentage of people will be affected by this tax. Realtors are more assured (for now at least) that this tax will not make it more difficult for most of their clients to sell their homes. However, the tax was added into the Medicare bill right before it was sent to vote with no time for review. The National Association of Realtors did oppose it at that time. Whether you feel it is fair or not is for you to decide.

Coldwell Banker Realty Corp. is located at 600 E Main Street in Lansdale PA. To learn more about this new tax or anything real estate related, call us at 215-855-5600 or email us at info@cbrealtycorp.com