Real Estate Q&A
Grand Junction Realtor Dave Kimbrough answers your questions in Real Estate Weekly every Sunday.
Happy Holidays. My email is not so much a question, but a topic I believe needs to be addressed and clarified. While I was attending a Christmas party this past weekend I mentioned, in casual conversation, to one of my friends that we were considering selling our home this spring. He said they were thinking about selling in the next year or two, but the new 3.8% sales tax on homes sales that stems from the Obama Care health insurance that is going into effect after Jan. 1, 2013 had them thinking twice. I was in disbelief; I had not heard anything about this and thought he was just “kidding,” but he assured me it was true. Over the weekend, I did some research and much to my surprise it is true. I was thinking it would be a great topic to cover, since I am sure I am not the only one who is “out of the loop” on this new sales tax.
— Dale, Grand Junction
Awesome question! (Or should I say topic of conversation) This is something we get a lot of questions about and a good friend of mine, Rick Hamm at Unifirst Mortgage, sent me a great summary of what this new tax will entail.
You are right, with the Affordable Care Act that was upheld in 2012, there will be an additional capital gains tax on investment income which covers interest income earned, dividends, rents as well as capital gains. As far as your primary residence, the only time a principal residence can be subject to this tax is when the following criteria come together:
1. If a married couple makes more than $250,000 or an individual makes more than $200,000 per year during the year their principal residence is sold, the sellers’ gain will be subject to this surtax, IF the $250,000/$500,000 exemption rule is exceeded.
2. If the seller is in the higher income bracket, the seller may still not be subject to this tax if the sellers gain is less than $500,000 for a couple or $250,000 for an individual.
The exclusion rule simply means gain on the principal residence under $250,000/$500,000 is NOT subject to taxation. This exemption from taxation on gain under $250,000/$500,000 on the principal residence still, as of today, remains in place and therefore not subject to capital gains tax. The $250,000/$500,000 is an exemption that applies to either single filers or household filers respectively.
Lets say a married couple makes $300,000 per year, gross adjusted income prior to the sale, and they are going to have a gain of $600,000 on the sale of their principal residence, then the new taxation of 3.8% would be based on the $100,000 overage of the $500,000 exemption. This means that they would pay an additional $3,800. To sum it up, Bob Ellis, CPA of The Ellis Group, says “Gain on a residence is not taxable unless the gain exceeds the $250,000 or $500,000 exclusion, and then only if the total income exceeds $200,000. Since this law is not actually “law” until 2013 and therefore not in the tax code yet, how it will be interpreted and deciphered in the world of accounting will likely not be clear until sometime in 2013.”
It is highly recommended that if you feel like you may exceed the income threshold and stand to make above the exempted gain, you should consult your accountant and make sure that you are aware of any potential tax liabilities that may come into play. We will all get more versed with the purposed tax as it actually goes into effect and we have time to see how it plays out. The bottom line is, don’t be scared off from making a decision about selling by the new tax — get informed so when you make your decision you go into it with “eyes wide open” and can make the best decision possible. Times are changing, we need to accept the change and work with our accountants to make sure we all are financially aware! Great topic, Thanks.
The Kimbrough Team
RE/MAX 4000, Inc