News

Reminder: 3.8% Tax is Not a Transfer Tax on Real Estate17 Oct

Tax time is nearing and once more rumors are circulating on the Internet and by e-mail that the health care reform law enacted two years ago includes a 3.8 percent transfer tax on real estate starting in 2013. That rumor is not true;  It’s a tax on a very narrow band of investment income for high-wealth households (those who earn $250,000 in a joint return or $200,000 as an individual) that could come into play on the sale of a house if the sales gain is more than $500,000 for a married couple or $250,000 for an individual.

Even in the unlikely event the sales gain is more than that amount, the tax would only apply based on other considerations having to do with the household’s income and tax situation. The bottom line is that the tax, which was imposed to help shore up Medicare, will hit only some portion of investment income.

Shortly after the federal government enacted sweeping healthcare reform earlier this year, there was considerable concern over a last-minute addition to the legislation: a 3.8 percent tax on investment income of upper-income households to help shore up Medicare. The tax takes effect in 2013.

Among the concerns expressed among consumers and business people, including real estate professionals, both then and today, is that the tax amounts to a transfer tax on real estate. Not true, NAR Director of Tax Policy Linda Goold says.

Here’s how the tax works. For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. I say “might” because whether the tax applies or not depends on many factors having to do with the kind and amount of the investment income the household receives.

Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income.

Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.

Let’s take a look at a married couple that has $325,000 in adjusted gross income (AGI), plus $525,000 in capital gains from the sale of their house.

This household would be considered upper-income by most standards. Not only is their income relatively high, at $325,000 (adjusted gross income, or AGI), but they’re receiving a $525,000 gain on their house sale. Presumably, they bought their house years ago and it’s appreciated over the years, so upon selling it, their gain is a relatively high $525,000.

For this household, only $25,000 in investment income would be subject to the 3.8 percent tax. That would amount to $950. That’s because it’s the $25,000 over the $500,000 capital gains exclusion that’s taxable.

Before they would know that, though, they would have to do a calculation that involves their adjusted gross income. They would have to add their capital gain of $25,000 to the amount of their income above the $250,000 income trigger (for married couples).  Since their income is $325,000, they would add the $25,000 to $75,000 ($325,000 – $250,000), which would equal $100,000. Then they would compare the $25,000 to that $100,000, and apply the tax to the lesser of the two, which is the $25,000. Thus, $25,000 x 3.8% = $950.

So, you have a household that had income of $850,000 for the year, and its tax on investment equaled $950.

This is a simplification. Other tax issues could come into play. But it shows that the tax applies to just a portion of investment income for certain upper-income households and that the capital gains exclusion remains untouched.

Nobody likes taxes, and this tax was inserted into the legislation at the 11th hour as a “pay-for,” that is, as a revenue generator to help offset some of the costs of the reform. It’s expected to generate $325 billion over eight years.

NAR has prepared a brochure that looks at how the tax might apply under eight income scenarios: 1) sale of principal residence (which we just looked at), 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, and 8. purchase and sale of investment property.

You can download the brochure for free. It’s written in plain language and I think you’ll find it organized efficiently, so you can see at a glance the potential considerations for the different scenarios. Of course, it’s just guidance: each household’s situation will be different, so you would want to suggest to your customers and clients that they consult with a tax advisor to make sure the tax is applied correctly in their case.

 

Comments are closed.

2016 NAR Committee Recommendation Process is Underway!

Are you or someone you know interested in serving on an NAR committee in 2016?   

The online Committee Recommendation Form on REALTOR.org is now open and accepting recommendations!  Please read the following important information regarding the Committee Recommendation Process:

Re-appointment to Committees & Continuing Terms

Committee members are NOT automatically considered for reappointmentA member currently serving on a committee, whose term expires in 2015 MUST submit a recommendation via the Online Committee Recommendation Form if he/she would like to be considered for service in 2016. 

Members who have a continuing term that expires in 2016 or 2017 do not need to submit a recommendation to remain on the committee; they will remain until the term expires.

Process for 2016 Committee Recommendation Process

The deadline for submitting committee recommendations is May 22, 2015.  All recommendations must be submitted via the online form.

Using the form, you can recommend yourself or another suitable candidate.   When submitting a recommendation you are required to include relevant comments that highlight the candidate’s skills and qualifications for the position.  All comments are confidential.

We encourage you to seek recommendations from colleagues with whom you have worked closely, in particular members of state and national leadership.

Follow these steps to access the Committee Recommendation Home Page:

1. Log-on to REALTOR.org
2. Click the “About NAR” tab at the top of the page
3. Click “Governance” in the right hand side of the page
4. Click “Committees” in the right hand side of the page
5. Click “Committee Selection Process” in the right hand side of the page
6. Click “Enter and view your committee recommendations” in the center of the page

The link below may also be used to access the recommendation form directly on REALTOR.org. http://gms.realtor.org/comrecords.nsf/comselMbrhome?readform

Things to Consider when Submitting Recommendations

Please review the committee structure, which lists each committee’s purpose statement, composition (how many members), length of term, and specific qualifications for consideration to see what committee you would best serve.  Please note that if appointed to a committee you will be expected to attend all of its meetings and serve the full length of the term.  Furthermore, please note that forums are open to all members; so recommendations need not be submitted for forums unless you are seeking the position of chair or vice chair.

The committee structure* can be found by clicking “View Committee Information” on the committee recommendation homepage (link provided above).

*Note: The content is from the current (2015) committee structure.  The 2016 committee structure will be approved at the REALTORS® Legislative Meetings & Trade Expo in May, 2015.

Expertise Profiles

NAR’s Expertise Profile Database was designed to provide all levels of the REALTOR® family (including the Local, State and National Associations) with key information about you and your professional experience. The information that you will provide in this profile will be used as a resource in a variety of ways, including identification of members with certain expertise to serve on committees, working groups, presidential advisory groups; also, to respond to surveys about association issues, products, services etc.  

Individuals interested in serving on NAR’s committees are encouraged to create and/or update their expertise profiles.  However, they are not required. Please note:  Completing an expertise profile is NOT the same as submitting a recommendation for yourself!  If you wish to serve on a committee you still must submit a recommendation via the online Committee Recommendation Form on REALTOR.org.

To access the Expertise Profile page*:
Click “Enter Your Expertise Profile” on the committee recommendations homepage (http://gms.realtor.org/comrecords.nsf/comselMbrhome?readform)

Turn to REALTOR.org for the Latest Information

Use of electronic mail and the NAR Governance page on REALTOR.org serves as the vehicle for promoting and publicizing information related to the Committee Recommendation/Selection process.  Therefore it is imperative that you adjust your email spam filter settings so that you receive important emails from NAR.

NAR Governance Home Page*:

http://www.realtor.org/user/login?destination=/governance

Committees Home Page*:

http://www.realtor.org/governance/committees

*Members need to have a REALTOR.org login and password to access these pages.  Contact Information Central at (800) 874-6500; InfoCentral@realtors.org for login and password assistance.

 

Contact Information

Alaska Association of REALTORS®
4205 Minnesota Drive
Anchorage, Alaska 99503

Phone (907) 563-7133
FAX (907) 561-1779
Toll-Free (800) 478-3763

joinus@alaskarealtors.com