ACA Sales Tax on Home Sales
For many people their primary principal residence (your home) is their largest single asset. Many important legal issues arise when you sell your home. Independent legal counsel can protect your interests when you buy or sell property. Paying an attorney by the hour for her to stand in your corner can make you feel more secure. I have been asked by clients about the Obama Care’s new 3.8 percent sales tax on home sales; this tax is wrapped into the Patient Protection Affordable Care Act. In general, this statement is not accurate and is used by folks who want to get you scared or at least limit the way you think about the issue.
While all real estate transactions were/are subject to capital gains tax there have been various exemptions regarding the sale of a home. Home here means something very specific. Rental property, commercial real estate and homes that don’t meet the criteria of a primary principal residence remain subject to capital gain tax and possibly income tax. In general, no tax is owed for most sales of real estate if certain criteria are met. One, the real estate must be your primary principal residence. If you owned the property and used it as your home for two or more years out of the past five, the property qualifies as a primary principal residence. Two, the sale must be the only sale of a primary principal residence in the last two year. Three, the property cannot have been used for business or rental purposes. Four, if there is a gain and it is below $250,000 for a single person or below $500,000 for a married couple, no capital gain tax is owed. It is important to remember that this is tax on the capital gain and not tax on the sales price. I do not know of any Iowans that own homes that have appreciated in this amount.
As an example, if a married couple purchased a home for $300,000 and sold it for $600,000 (again rare) the transaction is excluded because the capital gain ($300,000) is below the limit for a married couple.
Further, The Patient Protection Affordable Care Act (Obama Car) does include a 3.8 percent tax on investment income for individuals making over $200,000 per year or married couples filing jointly earning over $ 250,000 per year. However, the tax only applies to long-term gain above the exclusion limit for the sale of real estate. If a married couple purchased a home for $300,000 and sold it for $900,000, the gain $600,000. (This really does not happen in Iowa) The amount over the exclusion limit of $500,000 for a married couple is only $100,000. Only the gain is subject to the new sales tax and then only if the household has income of more than $250,000. It not true there is a new 3.8 percent sales tax applied to all real estate sales. The tax only applies to high-income individuals who have substantial gain in the sale of a primary residence. If someone tells you that there is, they are either mistaken or trying to scare you.