The National Association of Realtors has prepared a new guide on the 3.8% tax affecting some real estate transactions. The tax is not a transfer tax on real estate sales and similar transactions (The Real Estate Transfer Tax is a tax on the sale, granting, and transfer of real property or an interest in real property).  Not long after the tax was executed, misleading documents went viral on the internet and created a great deal of confusion. Due to this confusion the tax was generally misunderstood.  

The new tax does NOT eliminate the benefits of the $250,000/$500,000 exclusion on the sale of a principal residence.  Therefore, only that portion of a gain above those thresholds is included in Adjusted Gross Income (AGI) and could be subject to the tax.

For example: John and Mary sold their principal residence and realized a gain of $525,000. They have $325,000 AGI (before adding taxable gain). The tax applies as follows:

 

John and Mary sold their principal residence and realized a gain of $525,000. 
h ey have $325,000 Adjusted Gross Income (before adding taxable gain). 
h e tax applies as follows:
AGI Before Taxable Gain $325,000
Gain on Sale of Residence $525,000
Taxable Gain (Added to AGI) $25,000  ($525,000 – $500,000) 
New AGI $350,000 ($325,000 + $25,000 taxable gain)
Excess of AGI over $250,000 $100,000  ($350,000 – $250,000)
Lesser Amount (Taxable) $25,000  (Taxable gain)
Tax Due  $950 ($25,000 x 0.038)

AGI Before Taxable Gain $325,000 

Gain on Sale of Residence $525,000

Taxable Gain (Added to AGI) $25,000  ($525,000 – $500,000

 New AGI $350,000 ($325,000 + $25,000 taxable gain)

Excess of AGI over $250,000 ($100,000)= ($350,000 – $250,000)

Lesser Amount (Taxable) $25,000 (Taxable gain)

Tax Due  $950 ($25,000 x 0.038).

REALTORS® should familiarize themselves with the tax, but should advise upper income clients or clients who have a large capital gains to seek the guidance of a tax professional.  The amount of tax will vary from individual to individual because the elements that comprise AGI differ from taxpayer to taxpayer.

Sources and links:

http://www.realtor.org/topics/health-care-reform/top-10-things-you-need-to-know-about-the-38-tax

http://speakingofrealestate.blogs.realtor.org/2010/11/24/the-3-8-tax-is-not-a-real-estate-transfer-tax/

http://www.realtor.org/small_business_health_coverage.nsf/Pages/health_ref_faq_med_tax?OpenDocument

Below is a chart listing the tax changes with the expiration of the Bush tax cuts.

http://www.realtor.org/small_business_health_coverage.nsf/docfiles/government_affairs_health_ref_marg_tax_rates.pdf/$FILE/government_affairs_health_ref_marg_tax_rates.pdf

http://www.revenue.nh.gov/faq/dra_800.htm

http://www.ksefocus.com/billdatabase/clientfiles/172/8/1437.pdf