Medicare Tax a Tax on New Home Sales is an Urban Legend!

July 03, 2012

NAHB LOGORumor has it that the 3.8 percent Medicare tax is a straight tax on new home sales. Is that true? No. According to a statement released by the National Association of Home Builders released on Friday, the tax increase is on capital income on high-income earners, and therefore, may affect some real estate investments through capital gains and rents, but it will have a “negligible impact on sellers of principal residences.”

NAHB has been tracking an email circulation falsely claiming that the healthcare reform legislation imposes a 3.8 percent sales tax on all home sales in 2013.

Revenues from the new tax will be dedicated to the Medicare Trust Fund, and the tax is an add-on to existing taxes on capital gains (on the sale of stocks, bonds, real estate, etc.) and other “unearned income” (dividends, rents and interest) for households earning more than $250,000 ($200,000 if filing a “single” return).

The tax will not have an impact on the sale of principal residences, which are subject to the existing $500,000 / $250,000 gain exclusion.

The tax will affect high-income earners who report taxable income due to capital gains, like on the sale of a second home, for example, but they will only pay increased taxes on the portion of the gain that causes the taxpayer’s AGI to exceed $250,000 – not the actual sales price.

If all of this is confusing, just know this: the “3.8 percent tax is not in any way a sales tax paid against the sales price of the home for either the home seller or home buyer. Nor is it an additional business income tax for home builders selling a new home out of inventory.”

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