by James Stefanile, ABR, GRI, SRES, QSC, REALTOR/Salesperson, Prudential NJ Properties, Montclair, NJ
Recently, one of my landlords frantically called me and said a good friend had told her there’s going to be a 3.8% tax on all future rentals courtesy of the “Obamacare” health care legislation. At a holiday dinner party the subject came up again with one of my fellow diners quite sure that there would be a 3.8% tax on all real estate transactions, starting in 2013, imbedded in the The Patient Protection and Affordable Care Act.
All this tumult emanates from a vaguely originated chain email that’s been circulating since 2010 which reads as follows:
“Under the new health care bill — did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don’t kick in until 2013 (presumably after Obama’s re-election). You can thank Nancy, Harry and Barack and your local Democrat Congressman for this one. If you sell your $400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Is this Hope & Change great or what? …
“Oh, you weren’t aware this was in the Obamacare bill? Guess what, you aren’t alone. There are more than a few members of Congress that aren’t aware of it either (result of clandestine midnight voting for huge bills they’ve never read). AND, there are a few other surprises lurking.”
This childishly worded email, ending with vague hints of future doom, is utterly false and a spurious attempt to spread dis-information and to frighten homeowners, especially seniors, who are thinking about selling and/or downsizing. Since it originated in 2010 it’s obvious it was meant to sway public opinion against the legislation, either killing it at birth or killing it in the courts.
I won’t get into a debate on the pros and cons of The Patient Protection and Affordable Care Act. That’s not the issue. It’s now been signed into law and re-affirmed by the Supreme Court. Republicans in the House of Representatives have also conceded that, with President Obama’s re-election and the Democrats’ expansion of Senate seats, after 31 attempts to repeal the law in the 112th Congress, that repeal almost certainly will not occur. If Congress initially voted for the legislation without reading it, as the email contends, then many in Congress must be idiots. On that point you won’t get any argument from me, even if I did believe this claim, despite the fact that in July 2009, a series of bills related to Obamacare were approved by bi-partisan committees within the House of Representatives and beginning June 17, 2009, and extending through September 14, 2009, three Democratic and three Republican Senate Finance Committee Members met for a series of 31 meetings to discuss the development of the health care reform bill. I won’t begin to try and figure out why the government and the President would want to “screw” the retiring generation. Apart from being inconceivable, that’s not the issue, either. The issue here is the veracity of the email quoted above and the motives of its originator(s).
I’m going to provide links to quite a few websites that will de-bunk this myth in great detail, but, in short, here’s the truth:
There is a 3.8% tax on page 33 of the reconciliation bill (a part of the overall legislation) that was signed into law (Section 1402 of the Health Care and Education Reconciliation Act of 2010, titled “Unearned income Medicare contribution.”) which will apply to only the tiniest of fraction of Americans. It’s not exclusively aimed at real estate transactions at all. It’s a tax on “unearned” investment income which can come in the form of profits from the sale of stock and quite a few other kinds of profit. Regarding the profit from the sale of real estate, when selling property that is your principal residence (that you’ve lived in for any 2 of the last 5 years), an individual is already, currently, granted a $250,000 exemption and married couples filing jointly are granted a $500,000 exemption from taxes on profits of the sale. Further, your adjusted gross income must be over $200,000 a year for an individual or $250,000 for a married couple filing jointly for this 3.8% tax to apply to you, in any case. The language in the new law states that the tax falls on “net gain … attributable to the disposition of property.” That would include the sale of a home. But the bill also says the tax falls only on that portion of any gain that is “taken into account in computing taxable income” under the existing tax code. So, all existing capital gains tax qualifiers and exemptions are still in place and your profit from the sale of a principal residence must exceed $250,000 for an individual or $500,000 for a married couple – given your adjusted basis which is minus all capital improvements you’ve made to your property and all legal fees and settlement and closing costs. The 3.8% tax only applies to that portion of profit in excess of existing tax exemptions and qualifiers and if you’re adjusted gross income is more than $200,000 individually or $250,000 jointly. Most tax payers in real estate transactions on a principal residence won’t come close to qualifying for this tax. In addition, this new tax only applies to certain types of investment income, apart from “earned” income. The 3.8% tax does apply to secondary residences and investment properties because the profits from the sale of these kinds of properties are already subject to existing taxes and are regarded as “investment income” by the IRS but the new tax will only apply if your income is above $200,000 (or $250,000 jointly) a year. If you have a high level of income and profit from “unearned” investment income, you are near the top of the American earnings tree and are already paying taxes commensurate with your good fortune.
The new tax, which will only apply to the very richest of Americans, will contribute directly to the Medicare Trust Fund. The government currently taxes investment income in various ways and could have simply raised current rates. But lawmakers wanted to link the new revenues to health care, so the point of doing it as a Medicare tax was to have the money go to the Medicare Trust Fund and have it act like a tax that is paying for health care and propping up the Medicare system. So, if you’re a rich guy on Medicare, a couple of reduced-price CAT scans will probably pay for whatever tax increase is levied on your profits from investment income. And, interestingly, according to a study recently published by the National Bureau of Economic Research, those who benefit the most from Medicare are the wealthiest older Americans, not the poorest ones.
In summary, the vast majority of home sales and, certainly, all individual rentals (excluding the profits from the outright sale of a rental property that is not a principal residence by an individual making more than $200,000 or a married couple making more than $250,000 a year) would not be touched by this new tax. It’s not a blanket sales tax on real estate as the chain email claims and it does not apply to all real estate transactions for all Americans. Consulting a tax professional is always my default advice and it applies to this situation as well.
The cowardly, intentionally or unintentionally mis-informed and, obviously, politically motivated. authors of this false email represent one more sad commentary on the current state of our “demonize the other guy” political system. These kind of scare tactics have no place in mature political discussion but are, again, alas, all too common in our current national dialogue. Our political discourse of late has been held hostage by the ideologically extreme opinions of the few, shouted in the loudest possible voice and frightening our potentially moderate, conceivably consensus-seeking representatives into silence and paralyzing compliance. That is why not a single Republican voted for the health care legislation although Republicans were involved in crafting it. Let me say, even louder than these strident idealogues, that the claim that all real estate transactions will be subject to this new tax is utterly false, insidious, plain old stupid and should be disregarded.
It’s been recently reported that French film star Gérard Depardieu is renouncing his French citizenship and moving to a small village in Belgium to escape French taxes. The current French government proposed a top tax rate of 75% which was struck down by France’s Constitutional Council. This level of taxation explains why so many of Europe’s wealthiest citizens have been tax refugees for decades. In light of staggering European tax rates, a 3.8% increase in taxes on a portion of the profits of the investment income of our wealthiest citizens seems laughable. Many of the richest Americans (Mitt Romney, for example) pay overall rates equivalent to only 15-20% of their total income (including investment income), so, any hubbub about the tax-beleagured rich in America is ridiculous. The richest among us are also knee-deep in tax loopholes.
I’m making it my quest to de-bunk this 3.8% myth. So, if you invite me to your dinner party, you’ll understand my aggressive reaction when the subject arises (as you know it will when there’s a REALTOR in the room). It astounds me that some folks will swear by the veracity of an anonymous email, a rumor or the uninformed report of a friend over the detailed explanation of a real estate practitioner. So, if it seems I won’t let up in the face of this kind of maliciously circulated lie, you’ll know why.
Want even more information on this subject? Consult the following: