Does this mean that all sellers will be subject to a 3.8% tax on their gain?
No. Since there are many complexities that surround this new tax, I’ll try to break it down into (3) yes or no questions:
1. Is the gain significant? For the individual: is the “realized gain” from the sale greater than $250,000? For couples: is the “realized gain” from the sale greater than $500,000? In a simple example, the realized gain is the selling price minus the price that you purchased the home. Of course, there are factors that can make the numbers change.
2. Is your income too high? For the individual tax filer: is your adjusted gross income greater than $200,000? For couples filing a joint return: is your adjusted gross income greater than $250,000?
3. Is the home an investment property? If you hesitated or didn’t know how to answer this, you’ll need your tax advisor to explain if the home is a primary residence or not.
If you answered “no” to all questions above, there’s a good chance this tax won’t affect you. For more examples, you’ll want to browse the National Association of Realtors’ publication titled, “The 3.8% Tax – Real Estate Scenarios & Examples.”
This interview I conducted with Noel Dalmacio has a few examples where a sale resulted in tax liability:
If you’re seriously considering selling, you’ll need to seek the advise of your accountant on this matter. Make sure the accountant is well versed on this new tax.
If you discovered that you have significant tax liability, one option to consider is a 1031 exchange.
Bottom Line: Yes, the new tax will end up affected many sellers who have significant equity. However, with the recent appreciation surge of the past year, most will be better off selling now vs. 1 year ago.