Time for the Annual “Is There a Real Estate Tax Hidden in the Health Care Bill” Questions

My husband emailed today all a tither and asked why we are not selling our home and renting before 2013. Seems he received an email from a Realtor that said under the new health care bill all real estate transactions are going to be subject to a 3.8% sales tax. I thought he read my blog when I addressed this on DallasDirt:

“Will you ever sell your house after 2012? Call your Democratic Senator’s Office to confirm this hidden fact about the ObamaCare regulation. Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? That’s $3,800 on a $100,000 home, etc. When did this happen? It’s in the health care bill. Just thought you should know. SALES TAX GOES INTO EFFECT 2013 (Part of HC Bill). The bulk of these new taxes don’t kick in until 2013. 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.”

The new health care legislation is a mighty complicated piece of work. But the truth is there is no truth to this real estate tax, sort of. It’s a tax on capital gains.  The new health care law DOES impose a 3.8% Medicare tax on investment income starting in 2013. That’s for high-income individuals, they being defined as those earning together $250k-ish or more per year. This rumor can be traced to Paul Guppy of the Washington Policy Center who said this was, in effect, a 3.8% sales tax on all real estate sales. It’s not.

But then, it could be, if you have a lot of equity in your home. If you make any money when you sell your home, you will have to pay the 3.8% tax if you are considered to be rich — that is, you earn (combined) more than that $250,000 income threshold. Let’s say a couple who earns more than $250,000 per year sells their $2 million dollar home to downsize. They make a $750,000 profit on the sale. They will have to pay that extra tax of 3.8% on $250,000 — that’s $750,000 minus the $500,000 capital gains tax threshold freebie. The tax they pay would be $9,500.

And that’s $9,500 they would not have paid prior to the health care legislation.

My CPA also tells me that you are no longer able to invest your equity and capital gains in another home as you once were to avoid capital gains taxes.  Government tax policies sure do affect real estate — remember tax law changes in the 1980s that sunk the market? 

The thing about this that is so dumb, regardless of how you feel about the health care legislation, is that it could DISCOURAGE people to pay off their homes because, obviously, the more you own of your home free and clear, the more tax you are going to pay. We’ve just seen what having a ton of housing debt and zero principle payment mortgages can do to the economy. But here’s government legislation steering us right back into debt. Of course, the vast majority of homeowners have no where near half a million in equity in their homes. This is not a tax on real estate. It’s a tax on the rich, defined as those earning $250,000 a year or more. May or may not be a bad idea. What do you think?

Update: Thank you, Tex, for keeping me informed. You are correct, I confused pay off with investment basis. All the debt in the world won’t affect the actual gain. Still, this legislation will likely affect older homeowners — the Baby Boomers — more than any other demographic. Of course, the arguement could be made that this is the group who will be utilizing health care more so, pay up.