New property taxes bring confusion

During the recent spring break, we visited with family and friends who were considering real estate buying and selling.

A couple sold their primary residence, a modest brick Tudor in a well-established suburban neighborhood, and bought a “maintenance-free” condominium downtown. Another couple, their three now older and missing children, were looking for a smaller house nearby where they could grow vegetables and flowers. Gardening is their passion. A brother-in-law, a retired stockbroker who now monitors and operates from home operations, said he plans to sell his split-level home over the next two years because “all real estate would be more. imposed in 2013 “.

He is not alone in his thinking. The truth, however, is that only a small percentage of home sellers will pay the new 3.8% tax on certain investment income that will take effect in January 2013. The new tax will not apply to a large majority of population. The new tax was passed by Congress last year with the aim of generating an estimated $ 210 billion to help fund President Obama’s health and medicare plans.

“The healthcare plan could be repealed or changed in some way or another, and the 3.8% tax is certainly part of that plan,” said Rob Keasal, property tax specialist. “If so, I think we can all expect a similar tax to take its place.”

In reality, only taxpayers with incomes greater than $ 200,000 per year ($ 250,000 for married couples filing jointly) will be subject to the new tax. And even for those with high incomes, tax still won’t apply to the first $ 250,000 on profits from the sale of a personal residence – or the first $ 500,000 in the case of a married couple. selling their house. The entire exemption on the sale of a principal residence remains intact and can be claimed every two years.

In addition, the payout is a net number. It is not simply the difference between the original purchase price and the eventual sale price. Homeowners can subtract real estate commissions, excise tax and capital improvements before arriving at a net figure for capital gains purposes.

According to the National Association of Realtors, the median home price over the past 12 months was $ 193,200 in the West, $ 136,600 in the South, $ 126,300 in the Midwest and $ 236,500 in the Northeast.

“What we know for sure is that the long-term capital gains rate will remain at 15% for 2011 and 2012,” Keasal said. “For 2013, it could go up to 20% or be completely changed again. But, right now, high income people with a second home who are considering selling would be better off selling before 2013 as there is no exemption.

Here are some examples of the 3.8% tax for high income homeowners in 2013:

Added value: Sale of a main residence: Joe and Sally owned their home for 30 years and then sold it for a gain of $ 525,000. They have an Adjusted Gross Income (AGI) of $ 325,000 before adding the taxable gain on the home. The tax applies as follows:

AGI before taxable gain: $ 325,000

Gain on sale of residence: $ 525,000

Taxable gain $ 25,000 ($ 525,000 less $ 500,000) added to the AGI

New AGI: $ 350,000 ($ 325,000 plus $ 25,000 taxable gain)

Excess of AGI greater than $ 250,000 minus $ 100,000 ($ 350,000 minus $ 250,000)

Lesser amount (taxable excess sale) $ 25,000 (taxable gain)

New 2013 tax due: $ 950 ($ 25,000 times 0.038)

Since the new tax applies to the lesser of (a) the amount of investment income, (b) the amount by which the AGI exceeds the $ 200,000 or (c) the amount of the exemption for the sale of house ($ 500,000 for married couples), Joe and Sally would pay $ 950 in new tax on top of the capital gain on $ 25,000. If Joe and Sally had a gain of less than $ 500,000 on the sale of their home, none of that gain would be subject to 3.8% tax. Whether they paid the 3.8% tax would depend on the other elements of their $ 325,000 AGI.

Sale of a second home (without rental income for more than 14 days): The Olsens own a lakeside house which they bought for $ 275,000. They never rented it out to others except other neighbors on the lake for weekend family reunions. Their annual rental days have always been less than 14 days. They sell it for $ 335,000. During the year of the sale, they also earned income of $ 225,000 from other sources. The 2013 3.8% tax would apply as follows:

Income from other sources: $ 225,000

New AGI: $ 285,000 ($ 60,000 plus $ 225,000)

Excess of AGI greater than $ 250,000 minus $ 35,000 ($ 285,000 minus $ 250,000)

Capital gain: $ 60,000

Lesser amount: $ 35,000 (AGI excess less than the capital gain of a second home)

Tax due: $ 1,330 ($ 35,000 times 0.038)

Keep in mind that any new real estate tax will affect high income earners and this should not apply until 2013. Since three major tax changes took place in 2010, expect more. changes before 2013.

Tom Kelly is a former Seattle Times real estate writer. His book “Cash In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore of Stewart International.

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