Obama-Care 3.8% Tax on Real Estate Sales?

3.8 percent taxHave you heard that Obama-Care includes a 3.8% tax on real estate sales? Rumors abound and misinformation dominates any mention of the topic. Here are some facts.

Beginning January 1, 2013, the 3.8% tax on some net investment income took effect. The most common misconception is that it is a 3.8% tax on real estate sales. Untrue. It is not a transfer tax and will not be imposed on all real estate transactions.

3.8% Tax: Who is Affected and How Much Will You Owe?

Applies to:

  • Individuals with more than $200,000 adjusted gross income (AGI)
  • Couples with more than $250,000 AGI, filing a joint return

Types of Income Subject to the Tax:

  • Interest
  • Dividends
  • Net Rental Income
  • Capital Gains (less capital losses)


The new tax applies to the LESSER of:

  • Net investment income amount
  • Excess of AGI over the $200,000 or $250,000 threshold


Example: Sale of Principal Residence

John and Mary sold their principal residence and realized a gain of $525,000. They have $325,000 AGI (before adding the taxable gain).

The current tax law allows exclusion of capital gain on the sale of a primary residence in the amount of up to $250,000 for individuals and up to $500,000 for married couples, assuming the couple has owned and occupied for 2 of the previous 5 years. The new 3.8% tax would only be imposed on the gain over this threshold amount, and even then it would depend on the other components of the AGI.

The 3.8% tax applies to whichever is less: the total net investment income or the amount that the AGI exceeds the high-income threshold ($200,000 or $250,000). In John and Mary’s example, the following facts apply:

AGI before Taxable Gain: $325,000

Realized Gain on Sale of Residence: $525,000
Taxable Gain added to AGI: $25,000 ($525,000 sale price minus the $500,000 capital gains exclusion)
New AGI: $350,000 ($325,000 + $25,000)

Excess of AGI over $250,000: $100,000 ($350,000 AGI — $250,000 threshold)

$25,000 taxable gain is less than the $100,000 excess of AGI over $250,000, so the tax applies to $25,000.
Tax Due: $950 ($25,000 x 3.8%)


NAR Brochure Illustrates 8 Scenarios

If it is still clear as mud, this should help. The National Association of Realtors has produced a 10-page brochure that explains in plain language how the tax might apply under these eight scenarios:

  1. The sale of a principal residence
  2. Sale of a non-real estate asset
  3. Gain, interest, and dividend from securities
  4. Real estate investment income
  5. Rental income as sole source of earnings
  6. Sale of second home with no rental use
  7. Sale of inherited investment property
  8. Purchase and sale of investment property

Download the PDF for easy-to-understand examples of these scenarios, and please consult with your tax adviser to be sure you understand how the tax applies to your personal situation.


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