Realtor Ranjana Shreedhar
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10105, S De Anza Blvd. Cupertino, CA 95014
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Saturday, November 17, 2012

The 3.8% Obama Care Tax from 2013. Will It Impact Your Real Estate Sale?

Beginning January 1, 2013, a new 3.8 percent tax on some investment income will take effect. Since this new tax will affect some real estate transactions, it is important for home sellers to clearly understand the tax and how it could impact a real estate sale from 2013 onwards.
Note that this tax WILL NOT be imposed on all real estate transactions, a common misconception. Rather, when the legislation becomes effective in 2013, it may impose a 3.8% tax on some (but not all) income from interest, dividends, rents (less expenses) and capital gains (less capital losses). The tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI. The tax is not payable at close of escrow, but is due at the end of the tax year, if applicable.

The new tax applies to the LESSER of
  •  Investment income amount
  •  Excess of AGI over the $200,000 (for individual filers) or $250,000 amount (for joint filers)
Here are a couple of example scenarios: 

Capital Gain: Sale of a Principal Residence

J and M sold their principal residence for a gain of $550,000
They have $325,000 Adjusted Gross Income (before taxable gain)

The tax applies as follows :
AGI Before Taxable Gain  $325,000
Gain on Sale of Residence$550,000
Taxable Gain (Added to AGI)$50,000 ($550,000 – $500,000*)
New AGI $375,000 ($325,000 + $50,000 taxable gain)
Excess of AGI over $250,000$125,000 ($375,000 – $250,000)
Lesser Amount (Taxable)$50,000 (Taxable gain)
Tax Due $1,900 ($50,000 x 0.038)
* Capital Gains Tax-Free Limit Filing Jointly

If J and M had a gain of less than $500,000 on the sale of their residence, none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax would depend on the other components of their $325,000 AGI

Sale of a Second Home with No Rental Use

The Bridgers own a vacation home that they purchased for $275,000. They have never rented it to others. They sell it for $335,000. In the year of sale they also have earned income from other sources of $225,000.

The tax applies as follows:              
Gain on Sale of Vacation Home$60,000($335,000 – $275,000)
Income from Other Sources$225,000
New AGI$285,000($60,000 + $225,000)
Excess of AGI over $250,000$35,000($285,000 – $250,000)
Capital Gain$60,000
Lesser Amount (Taxable)$35,000(AGI excess)
Tax Due$1,330($35,000 x 0.038)

Note: If the Bridgers rent the home for 14 or fewer days in the course of a year, the rental income is non-taxable and the results in the year of sale will be the same as shown above. If the rental period exceeds 14 days in any year, then the rental income (less expenses) will be taxable and AGI would include not only the capital gain, but also some amount that is depreciation recapture.

Disclaimer: This educational article is intended to provide you helpful information and useful examples, and not to provide tax advice. As always, it is best to consult your tax professional for your specific circumstance. 

Author Ranjana Shreedhar, Realtor:

I am Your Realtor for Your Real Estate Success. If you are planning to Sell your house, pricing it right is the most important first step.  Call me for a no-obligation evaluation of your home, at 408-861-8026.
My goal is to make you successful through a quick sale of your home bringing my core price setting skills, marketing skills, integrity, and exceptional service! 

If you are in the market to Buy your dream home, I can help you find the right home, and be there for you throughout the transaction. 
If you or any of your friends are in the market to sell or buy a home in the Bay Area, I'd be delighted to help you or your friends, as the case may be, achieve your real estate goals with exceptional service, high integrity, and market savvy. 

Contact me through Email or on phone (408)861-8026 or through the handy contact form on this page.


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