"All Things Edmonds" Blog

Health Care Reform's Impact on Real Estate:
Fact or Fiction?

A little known clause in the health care bill passed earlier this year includes a little-known provision for a 3.8% excise tax on real estate sales. I've received emails and read articles on the internet about this slight of hand by those on the Hill.  But rather than take a position one way or the other - because the sky is neither falling nor are we witnessing heaven on earth - on health care reform, let's take a closer and try to answer the question of the day:  Does the new health care law impose a 3.8% "sales tax" on real estate sales?  For most Americans, the answer is no. However, some exceptions do apply.

Irrespective of your views on taxes, Democrats, rich people, sick people, health care or UFO's, here's a quick look at who might "qualify" under this little known provision and what it means in terms of real dollars per real estate transaction.

First, it's worth noting that all homeowners are allowed what's called a homestead exemption which exempts the first $500,000 in profits from the sale of your primary residence ($250,000 for single people) from any federal capital gains tax.  So, if you sell your primary residence at a net profit of $400,000 you'll owe nothing in capital gains (single people would owe on the $150,000 above their limit).  There are other guidelines, but for the purposes of this blog post, this is sufficient background.  And the new Medicare 3.8% tax doesn't apply to anything below these already-existing thresholds.  Even so, the new tax applies to a very small minority of sales (if you're having trouble sleeping, start reading on page 33 of the the health care bill). 

It shouldn't surprise any of us that such a major piece of legislation actually costs money.  And there are two ways to pay for it: raise taxes or cut spending. And we know how good Congress is at the latter.  Whether you think it's a good thing or not, the Tax Foundation estimates that this new tax will affect just the top 2% of income earners in the country.  In the same report, they estimate that "as a result of the health care reform, the top 1 percent (of earners) would go from earning 14.7 percent of post-redistribution income to around 14.35 percent of post-redistribution income."   That's a far cry from the "nightmare" foreseen in the emails I've received from anti-health care/anti-Democrat folks.

The bottom line? Very few home-sellers will be affected by the 3.8% excise tax.  Emails including references portraying otherwise is, in my opinion, a disservice to everyone -- whether left or right leaning.  But, perhaps, you're one of the lucky few who might be eligible for the 3.8% tax. Here are some scenarios where the tax would apply that you might want to avoid (courtesy of FactCheck.org):

• A single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His tax on the sale of that vacation home would amount to $1,900, in addition to the capital gains tax he would have paid anyway.
• An "empty nester" couple with combined income of over $250,000 a year who sell their $1 million primary residence to move to smaller quarters. If they cleared $600,000 on the sale, they would be taxed on $100,000 of the profit (the amount over the half-million-dollar exclusion). Their health care tax on the sale would amount to $3,800 over and above the usual capital gains levy.

So, unless you're selling something for over $500,000 in profit, you probably have no need to worry.  Unless, of course, there's a UFO over head.

Casey
Edmonds, WA