From factcheck.org
Q: Does the new health care law impose a 3.8 percent tax on profits from selling your home?
A: No, with very few exceptions. The truth is that only a tiny percentage of home sellers will pay the tax. Only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it. And even for those who have such high incomes, the tax still won’t apply to the first $250,000 on profits from the sale of a personal residence — or to the first $500,000 in the case of a married couple selling their home.
The sort of people who would have to pay the tax might include, for example:
- A single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His tax on the sale of that vacation home would amount to $1,900, in addition to the capital gains tax he would have paid anyway.
- An “empty nester” couple with combined income of over $250,000 a year who sell their $1 million primary residence to move to smaller quarters. If they cleared $600,000 on the sale, they would be taxed on $100,000 of the profit (the amount over the half-million-dollar exclusion). Their health care tax on the sale would amount to $3,800 over and above the usual capital gains levy.
Thus, for the vast majority, the 3.8 percent tax won’t apply. The Tax Foundation, in a report released April 15, said the new tax on investment income (including real estate) “will hit approximately the top-earning two percent of families” when it takes effect in 2013.
“No, with very few exceptions.”
I chuckled.
I think my taxable income will be $249,000 each year going forward.
Is that 250 indexed to inflation…
Does the capital gain on the transaction count toward the $250k? If yes, then this pinches all real estate investors. With capital gain rates going up and more and more taxes being piled on, the case for investment (real estate or otherwise) starts to really change. In my case, I am better off not taking on risk and simply reducing any outstanding debt. Tax increases certainly will affect the risk premia that investors require. In San Diego, it is already difficult to make RE investments pencil and this will only exacerbate that problem. I also think that it is a fair assumption that taxes will continue to rise beyond what is currently forecast. Better to take your toys and go home.
I think T-Dub is right, if tax rules are sorta consistent.
I got hosed one year by taking capital gains on a tech stock. My ordinary income was low, but those gains pushed me into a new bracket that screwed me up in a lot of ways, including making my Roth IRA contributions illegal and causing penalties for having contributed.
If that same logic still applies, any reasonable gain on a house will put you into the “rich” category that Obama wants to punish.
FYI:
Calculated risk, many think highly of, estimates
“My current projection is for further house price declines of 5% to 10%, as measured by the Case-Shiller and Corelogic repeat sales indexes.”
See his discussion on the tragetory of future home price (national level):
http://www.calculatedriskblog.com/2010/10/fhfa-projections-for-fannie-and-freddie.html
Note: Some might doubt that north county SD may decouple from national trend.
Do not shot messenger.
By the way, by no means my upside post is meant to discourage anyone to buy a house. Why, think carefully, we found this is like a double bottom in stock market, the second bottom usually presents the best opportunity.
As long as ocean access homes are treated as a tradeable commodity, the prices will hold.
But, when liabilities like this, and other soon to be realized taxes, become reality, beach Re will be deflated to more closely match nationwide trends…
The trend in US taxes is up, up & UP!, and I doubt that even the nouveau riche will find Re a “safe” investment in the near future.
Which IMHO is as it should be – Homes are meant to be lived in, not sources of unending speculation/profit to be flipped over & over in a lame attempt to escape a collapsing economic situation.
Until the US is a safe place for true capital formation, this game will continue to unravel in fits & starts…
Then again, maybe the TBTF banks can collate mortgages in tranches and sell them 2-3 times to unsuspecting investors again, like they did from 2005-2007 😉
Bank of America accused executives at Taylor Bean, Colonial and Platinum of having fraudulently schemed to “double- and triple-pledge mortgages and steal assets” to hide their faltering conditions as the housing market declined.
BofA sues FDIC over Taylor Bean mortgage losses
That’s gonna leave a mark…
Got seed corn?
Thanks for the link, Jim. The 250K (500K married) exclusion is a loophole big enough to drive a McMansion through. Unless you are in the multi-million dollar real estate business or there is another bubble, not many of us are goingto run into this issue any time soon, even if your income is high. And, if you make 1.5M on your 20M house, I don’t think anyone is going to be real sympathetic at the 38K you have to fork over.
Newsboy #8: Over here we fully agree that the market for capital appreciaton in real estate (read: cash flowing commercial real estate) is quite a way off. Too much downward economic pressure.
Therefore, we are not interested in taking equity risk for bond-like returns. We are currently lending in the senior position and generating 6%-9% on quality deals at 70% ltv or less. Our clients find the risk/reward to be attractive with a portion of their 1% CD money.
We’re not chasing high yield (12%+) deals as the credit quality of the borrower/asset is too low.
We envision step two is to move back to the mezzanine debt world if/when the economy looks firm then ultimately back to the equity world several years from now we hope.
In summary, we see too much economic, political, and tax policy risk to take equity risk today.
Housing is a different story with somewhat different drivers.
ps: JTR we just concluded a China trip and they are lined up for miles to buy property here in the US…think Japanese in the 1980’s.
Boo hoo hoo. I’m all for simpler and fairer taxes, but this is nothing compared to the arbitrary taxes we already pay.
OT ~ “Fannie & Freddie May Need $215 Billion”
Full article: http://articles.moneycentral.msn.com/news/article.aspx?feed=OBR&date=20101021&id=12201855
*Chuckle* No bubbleinfo groupie of JtR can ever be anonymous.#13 was me…
clearfund,
Good luck with all those PRC capital export restrictions, and the Chinese “economic, political, and tax policy risk” is currently looking to go off the books, unless you’re talking about PRC directed investment…
T-Dub and Ted are correct. If you have owned a property for at least 20 years, the price you sell (even after the 500k exclusion) could easily push you above the gross 250K level. Price appreciate was astronomical in the past 2 decades. Not everyone was flipping into a home every 3-5 years. I know I couldn’t afford to buy in my neighborhood now.
Jim, what were the prices in the 80’s of these house you show?
“A single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His tax on the sale of that vacation home would amount to $1,900, in addition to the capital gains tax he would have paid anyway.”
Sorry if i am not clear…in this example if his sale price is $350 (50K profit), wouldn’t this profit be under the $250k threshold, and therefore the 3.8% health care tax not apply?
Thanks in advance.
“ski condo” = not primary rez
I think they allow second homes in the $250/$500 tax-exemption, which a ski condo might be considered.
If he rented it and filed a Schedule E showing it as an investment property, no tax exemption. He’d be paying his full tax rate plus the 3.8% on the $50,000 gain.
Nah exempt = It’s gotta be your primary rez for 2 of the previous 5 years. Also, he could still claim exempt even if he rented it 3 out of the last 5 if it was his primary for 2.
#15 newsboy: We’re not playing with the PRC buyers wanting to invest here. They are not permitted to take cash out of the country, however, the business folks who have off-shore businesses (read: checking accounts) are looking to stash the cash in homes on the west coast.
Thought, it seemed like history repeating itself….and we know how that ultimately turned out to our national benefit.
We’re competing to represent a gov lead group in a fund here.
The trend in US taxes is up, up & UP
Newsboy | October 21st, 2010 at 10:09 am
That’s false, of course. Taxes right now are the lowest they’ve been since World War I. The highest Federal income tax rate was 70% or higher from 1936 until 1981, and 91% or higher from 1951 until 1963. That rate is currently 35%-the last time it was lower than that was 1916.