May
21

A Lawyer’s Review of the “Sales Tax” on Some Real Estate Sales

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The internet is a great place to find information on any number of subjects.  Crazy as it seems, there are so-called experts who will weigh in on questions asked by already confused consumers causing more confusion.  The hot button topic lately is the new 3.8% sales tax on real estate.  Beware of conflicting reports and flat-out wrong advice.

The Basics:

  1. The tax only applies to income from interest, dividends, rents (less expenses) and taxable capital gains (less capital losses).
  2. The tax only applies to individuals with an adjusted gross income (AGI) above $200,000 in the tax year, and for married couples filing jointly with more than $250,000 AGI before adding the taxable gain.
  3. The formula for calculating the tax applies if # 1 and 2 are met, and is the lesser of the (a) investment income, or (2) the excess of the AGI over the threshold.

Example 1:  Married couple sells their home in 2013 for $1.2 million and realizes a gain of $575,000 in tax year 2013.  Their AGI is $350,000 before adding the gain.

Analysis:

  • #1 applies because this is income from a capital gain, and assuming no capital losses the gain of $575,000 is subject to the remaining rule. 
  • #2 applies because the couple has AGI exceeding $250k, but their total gain of $575,000 on the home is still subject to the exclusion of gains on the sale of a principal residence, so the couple is exempt from the first $500,000 of gain and thus must deal with $75,000 gain after the exemption.  $75,000 + $350,000 = $425,000.
  • # 3 shows the formula:  $75,000 gain + ($350,000 AGI – $250,000) excess threshold  = $175,000.  So the sales tax must be paid on the lesser investment income amount or $75,000.  3.8% x $75,000 = $2,850 additional tax to be paid.

Example 2:  James, a single person, sells his home in 2013 for $1,000,000 and realizes a total gain of $375,000.  It was his principal residence for the last 7 years and his AGI is $125,000.

Analysis:  # 1 applies but #2 does not, his AGI is below the threshold.  Tax does not apply

Example 3:  Jane, a single person, sells her home in 2013 for $3,500,000, and realizes a gain of $700,000.  It was her principal residence for the past 5 years and her AGI is $425,000 before the gain.

Analysis:

  • #1 applies on  the capital gain of $700,000
  • #2 applies as the individual has an AGI before the gain of $425,000 – higher than the $200,000 threshold for individuals
  • #3 shows the formula:  Capital gain reduced by $250,000 exclusion:  700,000 -250,000 = $450,000.   $450,000 gain + ($425,000 AGI – $200,000 threshold)= $675,000  So the tax is paid on the lesser number, which is $450,000.  3.8% x 450,000 = $17,100 

Many transactions will not be covered by this additional tax.  The principal residence exclusion handles many gains and the AGI thresholds will exclude many sellers.  Those who are not excluded will have to pay the 3.8% tax, but only on the lesser of the investment income or the excess over the threshold.

Seeking competent legal, tax and accounting advice is advisable.  This article is provided for information purposes only and not to be considered legal, tax or financial advice by The Real Estate Geezer.

 

Based on article by Jerry M. Feeney, Residential Real Estate Lawyer

Categories : Selling

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