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New 3.8% Tax on Sale of Real Estate Effective January 1, 2013

We have been hearing frantic rumors for months about a new 3.8% sales tax or federal transfer tax on real estate. Now that the dust has settled on the presidential election, and a sudden change to existing law is unlikely, we need to deal with the law, adopted in 2010, which will be in effect very shortly.

There is a new 3.8% tax effective January 1, 2013, but it is not a sales tax, not a transfer tax, and it does not target only real estate. This tax, imbedded in the Patient Protection and Affordable Care Act, is actually a Medicare tax. Medicare and Social Security Taxes have always been paid on wages, some by each the employer and employee. However, until now, sales of appreciated property, including real estate, have been subject to capital gains tax but not Medicare or Social Security Tax.

This new provision imposes a 3.8% tax on investment income, including capital gains, dividends, interest income and net rental income, on those taxpayers who have adjusted gross income in excess of $200,000 for individual filers and $250,000 for joint filers. Importantly, the tax is only imposed on the lesser of (i) the investment income or (ii) the amount by which the income exceeds the $200,000 or $250,000 adjusted gross income thresholds. For example, if a single individual has adjusted gross income of $210,000, of which $50,000 is investment income, the 3.8% tax will be imposed on $10,000, that is, only the amount above $200,000, and not on the full $50,000 of investment income. As indicated above, capital gain from the sale of investment real estate is included within the definition of investment income. However, the current exclusion for gain on the sale of principal residences, $250,000 for individual filers and $500,000 for married filers, will continue to be applicable so that only gain above those amounts will be included as investment income.

© MICHAEL BEST & FRIEDRICH LLP

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About this Author

Nancy Leary Haggerty, Land Resources, Real Estate Attorney Michael Best Law Firm
Partner

Nancy is a partner in the Land & Resources Practice Group. Her more than 30 years of experience covers a broad range of real estate law, including assisting clients in purchases, sales and leases of property, and development and zoning work; representing borrowers and lenders in real estate loans; assisting in foreclosures and workouts; advising on questions of condominium law; negotiating construction and architects' contracts; and assisting in real estate litigation.

She has worked extensively with TIF financing and municipal development...

414-225-4961
Steven R. Battenberg, business and tax lawyer, Waukesha law firm, Michael best
Partner

Steve focuses his practice in the areas of taxation and general corporate matters with a specific emphasis on non-profit tax, partnership tax, and Section 1031 Tax Deferred Exchange transactions. He advises clients on federal, state, and local business and tax issues arising from a broad range of complex transactions involving:

  • Organization and assistance with business start-ups
  • Buying and selling businesses
  • Succession planning for businesses and real estate transactions (including tax-deferred 1031 exchanges and low-income housing tax credit deals)
  • Nonprofit compliance issues (assisting nonprofit clients with obtaining initial tax-exempt status, dealing with unrelated business income taxes and assisting in maintaining tax-exempt status).
  • Drafting initial partnership and operating agreements for Limited Liability Partnerships

Steve also has extensive experience representing nonprofit corporations of varying size, having worked closely with tax-exempt entities on organizational and tax compliance issues. He currently serves as general counsel to multiple trade associations and charitable organizations.

262-956-6526