New Tax on Unearned Income Coming in 2013

You may have received a chain email about a new real estate sales tax of 3.8% in the President’s health care bill. Is this true, you may be wondering?  Kind of, the tax is on unearned income, and is part of ObamaCare to help generate revenues for the Medicare Trust Fund, but it only applies to a limited number of people. 

Starting in 2013, the new 3.8% tax is on unearned income of those with a high incomes, defined as those whose Adjusted Gross Income (AGI) is more than $200,000 or married couples filing jointly with AGI of more than $250,000. Unearned income is money received from some business income, capital gains, rents, dividends and interest income, offset by expenses.

Real estate sale’s capital gain, or profit, or the amount of money the property sells for over the purchase price is currently exempt from capital gains tax for  $250,000 (single)/$500,000 (joint), and this exemption remains. So the tax will not effect a sale unless the profit exceeds this amount AND the seller’s income exceeds the AGI limits.

For example, if a married couple sells a house for $400,000 that they purchased for $200,000, they realized a profit or gain of $200,000.  If their income exceeded the AGI threshold, they would pay 3.8% tax on $150,000 the amount that exceeded $250,000. This amounts to a $5,700 tax, not $15,200 as the chain email reported would be due on the entire amount.

With depreciated real estate values and lower personal incomes, probably only a small percentage of people will have to pay the tax. Remember, the amount of outstanding first and second mortgages doesn’t play into this calculation, even if the total loans exceed the sales price. So it is possible if the property was highly leveraged, and profits are consumed by loan re-payment, there could still be a tax due.


2 thoughts on “New Tax on Unearned Income Coming in 2013

  1. Very interesting and timely – I am working with a donor that should know this information – she owns some commercial real estate that is producing a huge amount of rent, and there would be a large capital gain on a sale . . . I plan on sharing this with her advisor today so he can determine the best course of action for her. Philanthropy is already part of the plan, but this may change things significantly.

    1. Kent says:

      According to the Wall Street Journal 2/22/2012, Obama’s new budget proposal includes lifting the 15% tax on dividends, and letting it be taxed at normal income tax rates, which he would like to increase to 39.6%. In addition he wants to phase out certain deductions and exemptions, so dividends could end up being taxed at 41 percent. Then don’t forget to add the new 3.8 percent unearned income tax, bringing the top tax some would have to pay to 44.8 percent.

Comments are closed.