ObamaCare Real Estate Tax

There’s been a story and an e-mail floating around for some time claiming that the recent health care reform bill would impose a 3.8 percent “sales” tax on the sale of every home. The e-mail has been rightfully debunked by the usuals (Factcheck.org and Snopes), but here is what the bill would actually do regarding taxation of the sales of homes.

First, there is no “sales” tax on home sales in the health care bill. The bill would impose, essentially, a capital gains tax on some home sales made by a limited number of taxpayers. The health care law contains a new 3.8 percent tax on “unearned income” for high-income taxpayers. Unearned income includes capital gains.

To be hit by the 3.8 percent capital gains tax, you first have to be a married couple making more than $250,000 in adjusted gross income or $200,000 if you are single. The capital gain on the home sale must also exceed $500,000 if this is a primary home and you are a married couple ($250,000 for singles). So for example, even if you and your spouse make $300,000 in wages and you bought a home for $600K that you lived in for a while and you now sell it for $1 million, your capital gains tax on that home sale would be zero. Even if the home sold for $1.2 million, thereby resulting in a capital gain of $600,000, only $100,000 of that capital gain would subject to the new tax (because of the $500,000 exclusion).

For those who earn above those income thresholds ($250,000/$200,000) and who have a capital gain on a home that is a second home or one that does not qualify for principal residence (i.e., lived in for too short of a time period), the full capital gain would be subject to the new 3.8 percent tax.

Over time, however, if the health care reform and the tax code were never changed, more and more home sales would be subject to this tax. That’s because the $200,000 and $250,000 income thresholds in the health care reform bill were not indexed for inflation leading more and more people to qualify for having to pay the 3.8 percent tax on their investment income (including some home sales). Furthermore, the $500,000/$250,000 primary home sale exclusion amounts are not indexed for inflation, meaning that over the long-run as home prices grow with inflation, more primary home sales would be subject to capital gains taxes.