Very Few Real Estate Transactions Will Be Impacted By New Medicare Tax

Since long before it was signed into law, the PPACA has been surrounded by misinformation, half-truths, and outright lies.  It’s long, and it’s confusing to read and understand.  It’s also highly politicized, which means that it’s easy to convince people that the bill contains provisions that it doesn’t, and vice versa, simply based on their political beliefs.

One of the rumors that has been circulating via email lately proclaims that the PPACA includes a 3.8% tax on all real estate transactions.  This is simply not true.  The email states:

UNDER THE NEW HEALTH CARE BILL – DID YOU KNOW THAT ALL REAL ESTATE TRANSACTIONS ARE SUBJECT TO A 3.8% “SALES TAX”?

YOU CAN THANK NANCY, HARRY & BARACK (AND YOUR LOCAL CONGRESSMAN) FOR THIS ONE.

IF YOU SELL YOUR $400,000 HOME, THIS WILL BE A $15,200 TAX.

Verified

Higher taxes on real estate investments. The 3.8% Medicare surtax would hit average, middle-class investors in real estate. A middle-class taxpayer who happens to sell real estate for a gain in a particular year would be liable for this new tax, regardless of how low her income might be in other, more typical years.

The PPACA does include a new 3.8% Medicare tax on certain investment profits and capital gains, but it only applies to high income households (those earning over $250,000 for joint filers, $125,000 for married people who file separately, and $200,000 for individual filers), and it only applies to capital gains above a specific threshold (capital gains over $500,000 for a couple or $250,000 for an individual).  So a couple filing jointly that earn less than $250,000 wouldn’t be impacted at all.  That’s the vast majority of American families.  For those who are in that high income category, the first $250,000 (for an individual) or $500,000 (for a couple) in capital gains would be exempt from the tax.  Snopes explains the confusion quite well, and includes an example of a wealthy family downsizing to a smaller home and making a profit of $750,000 on the house they’re selling.  The first $500,000 in profit would not be impacted by the new Medicare tax.  The additional $250,000 would incur a tax of $9,500 (3.8% of $250,000).

For high income earners who sell vacation or rental properties, any profits would be subject to the  Medicare tax.  But keep in mind, this applies to profits rather than the total sale price.

Most houses do not sell for profits of anywhere near the capital gains threshold.  And most families don’t qualify as high income households.  So most real estate transactions will not be impacted in any way by the new Medicare tax.

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for healthinsurance.org, medicareresources.org, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

Comments

  1. This is great this is one of the rumors I tried to debunk for people last Thursday during the call in show on 9 news.

  2. Gary McIntosh says

    Your conclusion in this story is only partially true. For sales OF PERSONAL RESIDENCES, you’ve nailed it. It only applies to higher income households, and only if the profits on the transaction exceed certain levels. But that is no where near all the sales of real estate in this country. So your conclusion misses the point. Real estate profits are going to be taxed, and many times, this profit moves the taxpayer over the threshold of what the Administration deems to be “high income taxpayers”. Many middle income families who own a piece of real estate will now pay this additional medicare tax of 3.8%, in addition to much higher income and capital gains taxes after January 1 unless the fiscal cliff is addressed soon.

    • Gary, I think I covered all of that in the post. I noted that all *profits* on the sale of investment properties would be subject to the tax (note that it’s profits only, not the full sale price), whereas only profits over $250,000 (for an individual) or $500,000 (for a couple) would be taxed on the sale of a primary residence.

      The tax is projected to hit the top two percent of households on the income scale. The vast majority of Americans (including pretty much all middle income families – since they wouldn’t meet the initial *income* threshold for this tax) won’t be impacted by it.

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