Help Correct the Misinformation about the Federal Health Care Law
In response to numerous e-mails concerning provisions of the new federal health care law stating that there is a new 3.8% federal realty transfer fee (RTF) on all home sales, NJAR® urges you to visit NAR’s website for information regarding RUMORS that a national RTF was created as part of the federal health care law. These rumors are FALSE. An across-the-board RTF DOES NOT exist as part of this or any other law.
As part of the federal health care law, a 3.8% medicare tax was enacted on net investment incomes for certain households (for individuals earning over $200,000 per year and couples earning over $250,000 per year). Furthermore, the 3.8% tax DOES NOT apply to all capital gains from a home sale. Only if the gain from the sale is over $250,000 for individuals or $500,000 for couples does the 3.8% tax apply. If the amount made from the sale as a gain is less than $250,000 for individuals or $500,000 for couples, the 3.8% tax does not have to be paid. Lastly, the 3.8% tax, if these provisions are met, does not take effect until January 1, 2013.
Understand the 3.8 Percent Medicare Tax
Congress imposed a 3.8 percent tax on certain investment income of upper-income households to help shore up Medicare. The tax takes effect in 2013 and has generated considerable uncertainty among consumers and real estate professionals. In a short video, NATIONAL ASSOCIATION OF REALTORS®(NAR) Director of Tax Policy Linda Goold explains how the tax works in the limited number of cases in which it would apply. Also, for additional information please view NAR’s brochure and flier displayed below.
View and Download the 3.8% Tax Real Estate Scenarios & Examples Brochure
View and Download NAR's Myth Busters Flyer
Just the Facts
New Jersey REALTOR® Magazine
By: NJAR® Government Affairs Director, Doug Tomson
There’s nothing worse than a rumor. More specifically, there is nothing worse than a rumor that people swear is fact. In politics, rumors are nothing new. In fact, at times I think one of the reasons so many people are enamored with politics is because of the rumor and intrigue that exists.
Perhaps as a result of the Internet, or the need for so many news channels to fill 24 hours a day with programming, two real estate related issues have been swept up in the rumor mill and no matter how hard the NATIONAL ASSOCIATION OF REALTORS® (NAR) or NJAR® works to set the record straight, misinformation persists. The American Clean Energy and Security Act (aka the “climate change bill”) and the Patient Protection and Affordable Care Act (aka the “health care bill”) have kept us busy answering questions about what is real and what is rumor. So, here are the facts.
Let’s take a look at the climate change bill first. The e-mails circulating usually start off by saying you will need a license to sell your personal home and that retrofitting to a certain energy code is required. This couldn’t be further from the truth. Here are a few bullet points from the bill that passed the House of Representatives. It:
- Does not create a federal energy audit requirement for real property;
- Exempts existing homes and buildings from any federal guidelines for new construction energy efficiency information labels;
- Prohibits the implementation of any labeling during a sales transaction;
- Leaves the decision to states as to whether to require energy audits, disclosures, etc.;
- Provides property owners with significant financial incentives, matching grants and tools to make property improvements and reduce their energy bills;
- Prohibits the Environmental Protection Agency from regulating residential and commercial buildings under the Clean Air Act;
- Eliminates an early proposal to allow citizens to sue over minor climate risks under the Clean Air Act; and
- Establishes green building incentives for HUD housing, including a loan program for renewable energy, block grants and credit for upgrades in mortgage underwriting.
If you would like to get more facts about the climate change legislation, please visit the Government Affairs page.
The health care bill has garnered the same level of misinformation, only this time the subject is a perceived 4 percent "sales tax" or "transfer tax" on the sale of a home. This is simply not true.
There is a new 3.8 percent Medicare tax on "net investment income" for high-income households. This new tax would only potentially apply to households with an Adjusted Gross Income (AGI) of more than $200,000 for individuals or more than $250,000 for married couples. Since capital gains are included in the definition of net investment income, an additional tax could result from the sale of real property.
As is always the case when you're talking about the tax code, the calculation of how much tax, if any, is owed is complex. Keeping in mind that the new 3.8 percent Medicare tax is assessed only when the $200K/$250K AGI limits are exceeded, the amount of net investment income subject to tax is the LESSER of total net investment income OR the excess of AGI over the $200K/$250K AGI limits.
Obviously, since the calculation uses the "lesser of" the two amounts, the household's wage income as a share of total income pays a key role in determining how much of any net investment income is subject to the tax.
However, even when the AGI limits are met, the new tax is not applied to all home sale capital gains. If the gain from the sale of the primary residence is below $250,000 (individual)/$500,000 (couple) then NO Medicare tax will have to be paid on the gain. The new Medicare tax would only apply to any home sale gain realized over the $250K/$500K existing primary home exclusion that results in pushing the filer's AGI over the $200K/$250K income limits.
In the case of a second home, the calculations are different since there is no exclusion that would reduce the amount of capital gain that would be included in the determination of the taxpayer's net investment income. The additional 3.8 percent tax will apply to the portion of the gain realized on the sale of a second home or investment property that will bring the filer's AGI over the $200K/$250K limit.
The new Medicare tax will take effect January 1, 2013.
There is nothing in the bill that impacts the mortgage interest deduction.
NAR has posted a Q&A on the provisions of the new health care bill on www.realtor.org/healthreform.
The most important thing to remember is, if you receive an article talking about a new tax on real estate or new real estate related requirements, please check www.njar.com or call the Government Affairs department so we can give you the most up-to-date information possible.