The New 2013 Real Estate Tax

As the end of the year approaches, we have been getting questions regarding the tax increase that applies to real estate, as outlined in the Patient Protection Affordable Care Act.

This new legislation is scheduled to take effect January 1, 2013 – less than two months from today.

It is the position of The National Association of Realtors that most real estate sales will not be impacted by this new tax of 3.8%. Their estimate is that 97% of all sales will be exempt.

To help consumers understand how the tax works, NAR has prepared a comprehensive brochure (2013 Real Estate Tax) which outlines several scenarios.  Some of the key points include:

• The purpose of the new 3.8% tax increase is to help ease shortfalls in Medicare.

• The tax will only apply to individuals who earn more than $200,000 a year and couples who earn more than $250,000 per year.

• Eligible sales of primary residences will still be able take advantage of the $500,000 capital gains exclusion.  The tax would only apply to gains above that threshold.

• Capital gains on investment properties or second homes may be subject to this tax should ones income exceed the limits above.

As with any tax issue, it is important to consult a financial profession when evaluating your personal situation.  However, it is important to note that the $500,000 capital gains exclusion will still be in effect, regardless of the income level. In today’s real estate market, a $500,00 exclusion is still significant.

In Maine, we on occasion run into situations where homes being sold have been owned by multiple generations and as such could potentially have very low cost basis, thus generating a significant capital gain upon closing.

At this time NAR is not contemplating an action to repeal this law.  According to their most recent announcements, action on this legislation would only be part of a broader approach to tax reform proposals.