Tax Change for 2013

Clarifying the “3.8% health care tax” as it applies to real estate sales.

Quick summary:  as of January, there will be an additional tax of 3.8% on unearned income- which includes capital gains income.

For primary homes- the additional tax only applies if the seller’s adjusted gross income exceeds $200,000 ($250,000 if married), AND the gain exceeds the exclusion amounts ($250,000 for single tax payers; $500,000 married tax payers).

For second homes/investment properties- if the tax payer’s adjusted gross income exceeds $200,000 ($250,000 if married), the 3.8% tax WILL apply to the gain.  This is not a tax on the selling price- it is a tax on the gain (profit).

Therefore, based on the current capital gains rate of 15%, the seller of a vacation home may be required to pay a total tax of 18.8% on the gain.

If the vacation home is held as a rental property, many sellers participate in a 1031 Tax Deferred Exchange. This strategy works if the plan is to acquire a replacement rental property.

For more information: talk to one of the experts at Realtex (a local 1031 Exchange company), or your accountant.