Ever since health care reform was enacted into law more than two years ago, rumors have been circulating on the Internet and in e-mails that the law contains a 3.8 percent tax on real estate.
The tax was passed by Congress in 2010 to help generate an estimated $210 billion to help fund President Barack Obama's health care and Medicare overhaul plans. It is sometimes called a "Medicare tax" because the proceeds are to be dedicated to the Medicare trust fund.
The National Association of Realtors (NAR) quickly released material to show the tax does not target real estate, and will, in fact, affect very few home sales. It is a tax that will affect only high-income households that realize a substantial gain on an asset sale, including a home sale, once other factors are taken into account. Maybe 2 to 3 percent of home sellers will be affected.
Nevertheless, the rumors persist, and the latest version that's circulating falsely says the NAR is advocating for the tax's repeal. While NAR does not support the tax (it was added into the health care law at the last minute and never considered in hearings), it is not advocating for its repeal at this time.
Linda Goold, NAR's director of tax policy, said the tax will affect few home sellers because so many different pieces must fall into place a certain way for the tax to apply.
First, any home sale gain must be more than the $250,000 to $500,000 capital gains exclusion that's in effect today. That's gain, not sales amount; so you really have to reap a substantial amount for the tax to even come into play. Very few people are walking away with a gain of more than half a million dollars today, even in the high-end home market.
For the few households that do see a gain of that size, only the amount above the exclusion would be factored into the tax calculation, and that would still only apply to high-income households, which the law defines as single people earning $200,000 a year, and joint filers earning $250,000 a year.
So, if you are a household with annual income of $250,000 or more, and you earn a gain of more than $500,000 on your house (again, that's after the $500,000 exclusion), any amount of gain above the exclusion would be plugged into a formula to see if it's taxable. If it turns out to be taxable, then the amount could be subject to the 3.8 percent tax. If the household had a gain of more than $500,000, but earned only $249,000 a year in income, the tax would not apply.
(Note that these are just hypothetical examples. To know if a case would really be subject to the tax, a professional tax preparer or tax attorney has to look at all the particulars of the tax filer's case. Only a tax professional is in a position to say the tax is applicable.)
The other thing about the tax worth noting is that, although it takes effect in 2013, any impact on taxes will not happen until 2014. That's because the tax filer would do the calculation in 2014 for the 2013 tax year. Because it's not a tax on a real estate sale but rather on a capital gain, it's not calculated at the time of an asset sale, whether that asset is a house or something else. It's calculated at the time the filer figures his or her tax.
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Some great news: For our area, the median sales price is now $205,000, compared to $181,000 for the same period of 2011. This represents a 13 percent increase from the same period in 2011. Total days homes are on the market have decreased from 279 to 191. Active listings in our local multiple listing services has decreased from 1,538 to 1,245. Current interest rates for an owner occupied home loan is 3.75 percent for 30 years, or 2.875 percent for 15 years, with approved credit.
Good news for investors: The number of households renting has increased by almost 17 percent and the rental market is strong with very few vacancies. The prices of rentals vs. what you can purchase a house for makes for an opportunity for good cash flow.
It is so important to know the statistics of your local real estate market fundamentals, like the balance of supply and demand, effects of market time, prices, negotiating leverage, absorption rates, affordability, dollar volumes, etc.
That helps you answer the big question: Is now the time to buy real estate?
Glenn Ault is a broker at Bray Real Estate in Rifle.