October 20, 2014

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October 17, 2014

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
Partner

Nancy Haggerty is a partner in the Land & Resources Practice Group. Her 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 agreements, and with a number of other...

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Partner

Steve Battenberg is a partner in the firm’s Waukesha office, practicing principally in business and tax law. Mr. Battenberg’s practice includes federal, state and local business and tax issues arising from a broad range of complex transactions involving start-up businesses, buying and selling businesses, low-income housing tax credits, rehabilitation tax credits (“Historic Tax Credits”) and real estate transactions (including tax-deferred 1031 exchanges). He also has experience representing nonprofit corporations, having worked closely with a number of tax-exempt...

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