The New 3.8% Investment Tax: How Does This Affect Real Estate Transactions

November 28, 2012 at 5:36 pm Real Estate Law

By Neil Garfinkel and Ivan Sperber of Abrams, Garfinkel, Margolis, Bergson LLP 

As of January 1, 2013, a new 3.8% federal tax on investment income will go into effect.  Contrary to widely disseminated misinformation, the 3.8% tax is not a “transfer tax” imposed on the sale of real estate.  Instead, it’s a tax on investment income such as capital gains, interest income, dividend income and net rents.  The tax will only apply to individuals with income above $200,000 and to couples filing jointly with income above $250,000.

So how does this affect real estate transactions?

Let’s say that Gina files individually and has income above $200,000.  When she sells her condo on the Upper East Side, she realizes a capital gain of $300,000.  But this doesn’t necessarily mean that the tax will apply to her.

If someone sells their principal residence, there is a capital gains exclusion on the sale of their home of up to $250,000 ($500,000 for couples filing jointly).  The condo is Gina’s principal residence so she has a $250,000 exclusion.  However, since Gina’s capital gains of $300,000 exceed the capital gain exclusion amount by $50,000, that $50,000 may be subject to the 3.8% tax. At the end of the day, Gina may have to pay an additional $1,900 in taxes on the sale of her condo due to the new tax.

The tax goes into effect in 2013 so if investment income is subject to the tax in 2013 it will be paid in 2014 when income tax returns are filed.  Individuals must consult their tax advisors to determine whether the tax will apply given their specific circumstances.  This article is for informational purposes only and is not intended to be, nor should it be construed as, tax or legal advice.

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