What does Obamacare have to do with the depressed real estate market? Alas, a lot. Buried amidst other landmines in the nearly 3000 pages of text of Obamacare—to be followed by at least 100,000 pages of regulations—is a tax on personal real estate sales profits—this, in addition to capital gains. From an Orange County Register editorial:
One of the latest revelations is a 3.8-percent new tax on home sale “profits” when the equity pocketed by an individual seller exceeds $250,000 or $500,000 for a couple. We doubt many Americans for or against the health care overhaul expected it also to result in paying an additional tax on top of the existing capital-gains tax when they sell their homes.
It’s difficult to gauge the full effect, but real estate experts at Zillow.com tell us about 88 percent of Orange County homeowners with mortgages have some amount of equity. Of course, homeowners who paid off or substantially paid down their mortgages have considerable equity, and there aren’t many Orange County houses selling for less than $250,000, the new tax threshold for individuals.
The stealth 3.8-percent tax is piled on top of the capital-gains tax, which is 15 percent for people in most tax brackets, but will increase next year to 20 percent.
And unlike capital gains taxes on primary residences, this tax can’t be rolled over.
I guess the Democrats who voted for Obamacare and our president really don’t understand—or care—that adding a substantial tax on home sales will not exactly help the real estate market rebound. And as for the whine that it only “taxes the rich,”—not so in states like CA and NY. For example, my 90-year-old-plus widowed mother would have had to pay when she sold the house she had lived in for 60 years to move near me—the more than $250,000 equity being her only real asset, with the proceeds needed to provide her care for the balance of her life. Tax the rich, indeed.
But wait, there’s more economic vitality draining news:
The new tax also applies to “interest, dividends, annuities, royalties, rents, passive income” as well as “net capital gain from the disposition of non-business property,” including personal residences.
That wouldn’t be the end of it either. Once a new tax becomes law, it becomes easy to increase it, for example, by reducing the threshold. What a disaster.
Repeal. Reform. Revise. Defund.
Update and possible correction: A commenter says that the tax on the real estate would only apply if the taxpayer reached the $250,000 per year, or $500,000 if married threshold for cap gains, and that a middle class person like my mother, whose income is primarily SS, would not pay the tax no matter how much she made on her house. That’s not how the OC Register editorial read. I hope that is true, although I think double taxing income (capital gains and the tax) isn’t the right way to go no matter how rich someone is. If someone else has more info on this, please add to the comments. Thanks.
Updated update and Correction: I did some more digging. The commenter is correct: The tax doesn’t kick in until after the capital gains threshold has been passed, and applies only to single taxpayers earning $200,000 and joint filers at$250,000. It’s all very complicated. Snopes.com has a good explanation.