Heads-up on the 3.8% tax

The National Association of Realtors (NAR) is working with its agents in making the public aware of a new 3.8% tax taking effect on Jan. 1, 2013.

This new tax is a bit complex and will impact some, but not all, real estate transactions. It was passed by Congress two years ago with the purpose of getting approximately $210 billion over 10 years to fund the health care and Medicare overhaul plans.

This tax may impose a 3.8% tax on some income from interest, dividends, rents (less expenses) and capital gains (less capital losses). Individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint tax return with more than $250,000 will be subject to this tax.

The new tax applies to what is the lesser amount of investment income as compared to AGI over the $200,000 for individuals or $250,000 for couples filing taxes. An example provided by NAR would work like this:

Sue and Bill sold their primary residence and realized a gain of $525,000. They have $325,000 AGI prior to adding the taxable gain. Therefore, they would incur the following tax: AGI before taxable gain at $325,000, gain from sale of residence at $525,000, taxable gain, which is added to AGI, at $25,000 (this is in the $525,000 – $ 500,000 range because of the $500,000 tax exclusion for a married couple on the gain realized on the sale of a primary residence), adjusted AGI at $350,000 ($325,000 plus $25,000 taxable gain), excess of AGI over $250,000 at $100,000 ($350,000 – $250,000), lesser amount subject to tax at $25,000 for taxable gain and tax due = $950 ($25,000 x 0.038).

So, if Sue and Bill had realized a gain less than $500,000 on the sale of their primary residence, none of that gain would be subject to the 3.8% tax. Whether they pay the 3.8% tax also depends on other considerations of their $325,000 AGI as well.

Other examples NAR provided of the 3.8% include those applied to capital gains involving the sale of a non-real estate asset, capital gains from interest and dividends, rental incomes, sale of a second home without rental use, sale of an inherited residential or commercial investment property and purchase/sale of residential or commercial property.


Mary Ann Clark is a Realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be e-mailed to [email protected] or reach her directly at 203-249-2244.

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