New laws and regulations always cause confusion about what is real and what is assumed by those who have not taken the time to do a little research. Rumors can cause frustration especially when they affect monetary issues.
Questions have developed around two issues that concern homeowners. Many Realtors as well as real estate agents are unable to explain to their clients the real and the perceived ramifications of these issues.
The Seattle City Council has been considering requiring all home owners to have an energy audit performed before a home could be sold. As a precursor to any legislation, the Council requested and received a $20 million grant to conduct a trial in South Seattle. Recently, it was reported that the trial had not started and the expected jobs were not realized. Reports about this trial and the fact that Puget Sound Energy is offering to conduct energy audits have led many to assume that the “Cap and Trade” climate change bill in Congress requires a homeowner to license their home prior to selling it. There is no requirement in the law to make homes energy efficient before they can be sold.
The recently-passed health care legislation has created concern over an inclusion of a 3.8 percent tax which will go into effect on Jan. 1, 2013. Many believe that this is a tax on home sales. It is not. This 3.8 percent Medicare tax can more accurately be described as an income tax on ”high-income filers.” A “high-income filer” is one whose Adjusted Gross Income (AGI) is over $200,000 for an individual or $250,000 for a couple. AGI includes net income from interest, dividends, rents and capital gains, as well as earned compensation and several additional forms of income presented on the Income Tax Return Form 1040.
Washington Realtors explained how a home sale can fit into the calculation of AGI:
- Sale of a primary residence: If the gain from the sale of the property is below $250,000 (individual)/$500,000 (couple), NO tax will have to be paid on the gain. The new Medicare tax would only apply to any gain realized over the $250K/$500K existing primary home exclusion that will bring the filers AGI (adjusted gross income) over the $200K/$250K limits.
- Second Home/Investment property: The additional 3.8% tax will apply to the portion of the gain realized on the sale of a second home or investment property that will bring the filers AGI over the $200K/$250K limit.
- Rental Income: The portion of net rental income that exceeds the $200K/$250K AGI limits will be subject to the new 3.8% tax.
If a profit of $30,000 is realized on a sale of a home after the $250,000/$500,000 deduction and AGI (Adjusted Gross Income) is below $200,000/$250,000, no additional tax will be due.
The new legislation also imposes a new 0.9 percent tax on all earned income that is above $200,000 for a single filer or for a couple earning more than $250,000. As an example, if earned income for an individual is $230,000, the 0.9 percent tax will be calculated on $30,000.
Even though the new Medicare tax is not a tax on home sales, it is clear that the proceeds from a sale do affect the income tax that must be paid. The National Association of Realtors has prepared an informational booklet, The 3.8% Tax Real Estate Scenarios & Examples and a NAR Frequently Asked Questionsform that offer help in understanding the new rule. The income tax that will be required to be paid will be different in each transaction. Knowing the truth should relieve many of the fears of people selling homes.
Joan Probala is the managing broker for Issaquah Windermere (Windermere Real Estate/East Inc.). She has 30 years of experience in real estate, construction and sales.