At Cassidy Associates Real Estate and Property Management Services, we have been helping people understand the 3.8 percent tax that is about to go into effect for home sellers. Following on last week's introduction to the tax changes, here are the 10 things you need to know about this tax, and how it may or may not affect your income.
If your total income is below $200,000 as an individual filer or below $250,000 as a married or joint filer, you will not be subject to the 3.8 percent tax. It does not matter how much you make off the sale of a house or property – if your income is below those levels, you are exempt.This 3.8 percent tax is not a transfer tax. You will not be required to pay this tax at the time of real estate purchase.
You will not pay this tax at your settlement. If you are required to pay the 3.8 percent tax, you will pay it when you file your income taxes.
When you are selling a principal residence, you will get an exemption on this tax if your capital gains are below $250,000 or $500,000. If you file your taxes as an individual, you will not have to pay this tax if you earn less than $250,000 on a principal residence you sell. If you file taxes jointly, your exemption is good on capital gains of up to $500,000. Any capital gain above these amounts will need to be declared on your Form 1040.
The 3.8 percent tax applies to many types of investment income. Real estate investments are not the only type of investment incomes subject to this new tax. Other investments that are taxed will include other capital gains, interest income, dividends and rental income after expenses.
This tax goes into effect in January of 2013. This means any income you earn that is eligible for the tax will not need to be filed or paid until you complete your income tax forms in the year 2014.
If you do not have income from capital gains, rents, interest or dividends, you will not have to pay the 3.8 percent tax. Even if you are a millionaire, you will not have to worry about the tax when your income does not come from those sources.
Any tax you pay will be on income earned after the $200,000 or $250,000 exemptions are met. For example, if you earn $205,000 of income and you are an individual filer, you will only have to pay the 3. 8 percent tax on $5,000 of that income. Remember to consult an attorney, tax professional or your CPA before you make any financial or tax decisions.
Income received from rents can be included in this tax, but it will only be net rent that is taxed. For example, only your rental income after expenses such as depreciation, property taxes and maintenance expenses is eligible for to be taxed. The California Association of Realtors estimates that this tax will affect between two and three percent of home sellers and investors.
This tax is part of the Affordable Healthcare Act, which was passed by Congress and signed by President Obama in 2010.
This information is only intended to be general information, and is provided by the California Association of Realtors. Consult an attorney and/or CPA for professional advice prior to taking any action based on this article.