Tax ‘hidden’ in health care bill would affect few sales

Posted by Mark Chapman on August 1st, 2010 at 1:05 pm

Dane Hahn

By Dane Hahn

The Realty Column

This week I got an email from a wor­ried reader who attached a clip from the Spokane, (Wash­ing­ton) Spokesman-Review news­pa­per which reported “after Jan­u­ary 1st 2013 all homes would be sub­ject to a health care real estate tax of 3.8 per­cent when they were sold.” The reader had done some quick math and fig­ured that on the sale of his $200,000 house the new tax would be $7,600. This would be on top of other clos­ing costs and fees—at a time when his house is already worth only about what he paid for it.

I looked into this right away because, as my 91-year-old mother likes to say, “this is impor­tant — if true.” It turns out that the rumor our reader saw in the news­pa­per is only partly right. The new tax is a func­tion of the Afford­able Care Act. Its lan­guage is buried in the back of the bill, and is only now being dis­cussed as we read this 2,400 page bill.

You can be sure that if this tax were pro­posed as a new stand-alone tax, it would have been hotly debated, and I believe it would have been defeated.

The good news is the Spokane paper didn’t get the story 100 per­cent right — by that I mean a typ­i­cal home sale would not incur this addi­tional tax bur­den. The word­ing of the bill says the tax falls on “net gain … attrib­ut­able to the dis­po­si­tion of prop­erty” (and that would include the sale of a home). But the bill also says the tax falls only on that por­tion of any gain that is “taken into account in com­put­ing tax­able income” under the exist­ing tax code.

The truth is that only sell­ers with incomes over $200,000 a year ($250,000 for mar­ried cou­ples fil­ing jointly) will be sub­ject to this tax. And even for those who have such high incomes, the tax still won’t apply to the first $250,000 on prof­its from the sale of a per­sonal res­i­dence — or to the first $500,000 in the case of a mar­ried cou­ple sell­ing their home.

Accord­ing to William Ahern, direc­tor of pol­icy and com­mu­ni­ca­tions for the non­profit Tax Foun­da­tion, “The home sales that would see a tax increase under this bill would have to be invest­ment or sec­ond homes or a prin­ci­pal res­i­dences gen­er­at­ing [a gain of] more than $250,000 ($500,000 for a couple).”

The bad news is this gets the IRS fur­ther into the clos­ing doc­u­ments of every real estate trans­ac­tion, and will doubt­less cause a num­ber of new pages to be included in every clos­ing. And of course, this tax lifts some of the prof­its home­own­ers would have earned from their sale at a time when they need these funds to pur­chase their next home. And here’s just a lit­tle more bad news, this tax, intended to help pay for expanded health care cov­er­age, will apply to all sec­ond (vaca­tion) homes or rental properties.

The peo­ple who would have to pay the tax might include, for example:

• An indi­vid­ual earn­ing $200,000 who sells his $300,000 Florida beach home for a $50,000 profit. His tax on the sale of that vaca­tion home would amount to $1,900, in addi­tion to the other cap­i­tal gains taxes he would owe.

• A cou­ple whose com­bined income exceeds $250,000 who sell their long-held pri­mary res­i­dence. If they cleared $600,000 on the sale, they would be taxed on $100,000 of the profit (the amount over their $500,000 exclu­sion). In their case, the health care tax on their sale would amount to $3,800 over and above the usual cap­i­tal gains levy.

The two trig­gers for this tax are if you exceed the IRS limit for home­owner exclu­sion, and if you exceed the income lim­its that year. The IRS does allow cer­tain tax­pay­ers to pro rate their exclu­sion. And I would imag­ine they will allow that here too. In the event a tax­payer is trans­ferred with a job-related move, the 24-month require­ment can be adjusted. Like­wise, if there is a divorce, there can be a pro rata amount of ben­e­fit offered. These will be ques­tions for your tax preparer.

But get­ting back to my reader friend, the tax due on the sale of his $200,000 prin­ci­ple res­i­dence would not be affected by this new tax.

—

Dane Hahn is affil­i­ated with Tar­pon Coast Realty and wel­comes calls from read­ers who might want to dis­cuss their real estate needs. Con­tact him at 603−566−5460.

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2 responses to “Tax ‘hidden’ in health care bill would affect few sales”

1. Gary Alampi

   8 / 1 / 2010
   2:25 pm

   Should the head­line read “Tax ‘hid­den’ in health care bill would AFFECT few sales”
2. Mark Chapman

   8 / 1 / 2010
   3:13 pm

   Nice catch! Thanks.

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