Boker's Blog

Over the last few weeks, I’ve received several emails, notes and calls about the 3.8% sales tax on the sale of homes starting in 2013. In every case, the sender of the communication sounded panicked about being hit with a huge tax bill when selling their current home. One caller claimed they were going to have to pay 3.8% of the sales price on the sale of their $1.4M property, which would be a whopping $53,200.00! Have no fear! Calm and reason – and accurate information – need to be applied here. She was completely misinformed, being led to believe this by a less than scrupulous or under-educated real estate agent who may have had a political agenda.

Here are the facts:
The 3.8% tax that will kick in in January 2013 is a tax on the amount of the CAPITAL GAIN above the capital gain exemption. In fact, it will only affect the very, very wealthy or those with a tremendous capital gain, and even then the amount to be paid will be very small. This is easiest to explain with a few example:

Example 1 – Typical Home Sale in Southern Orange County) - $750,000 sale price.
Let us say a client bought a home 20 years ago for $350,000. Let’s say it’s worth $750,000 today. Not including costs associated with the purchase of the home, not including any permanent upgrades and remodels and any costs associated with the sale of the home, the capital gain value is $400,000. If the owner is a married couple, the exemption is $500,000 so there is no capital gains tax and no additional sales tax! None, nada, zip!

Example 2 – High End Home Sale in Southern Orange County - $2,000,000 sale price.
A property owner bought their house 10 years ago for $1,000,000. They added a pool, remodeled the baths and kitchen and spent about $400,000 doing these remodels. They are going to sell their home for about $2,000,000. The cost of sales will be about 8% with all compensation and closing costs, so they will net about $1,840,000.00. So the net gain in value will be $440,000. Again, the gain in value is under the $500,000 exemption, so there is neither capital gains tax due nor 3.8% sales tax. Again None, nada, zip!

Example 3 – Someone who will owe some taxes under the new policy.
A single man buys a house 20 years ago for $500,000. He puts nothing into the house in the way of remodels. He never marries. He now wants to sell the house. It’s now valued at $1,000,000. His capital gain is about $500,000. He can deduct about 2% of the original price for buying costs and about 8% of the selling price for selling costs from his $500,000 capital gain. Following the arithmetic, his taxable gain would be about $410,000. Because he is single, he only receives a $250,000 capital gains exemption. So he has a taxable gain of $160,000. In addition to the capital gains tax due based on these calculations, he will have to pay 3.8% on the $160,000, which equals $6,080.00. So, on a $1,000,000 sale, in this example, he will in fact pay $6,080 in new taxes. If he were married, he would pay nothing and if he would have put any money into fixing the place up, that would have also lowered this liability. Certainly, $6,080.00 is a far cry from $38,000 estimated by those who fail to understand this new tax. Always be sure to check with your trusted Realtor or Certified Public Accountant for peace of mind.

Just thought you’d like to know the facts. For more information, you may want to check this link:
http://www.homeownershipuniversity.com/consumer-protection/3-8-real-estate-sales-tax-goes-into-effect-2013-part-of-health-care-bill/

Watch for my next blog entry - Half Empty / Half Full to follow soon!