Effective January 1, 2013…
Real Estate Sales Tax

In 2012, the Supreme Court of the United States upheld the Affordable Care Act.

What does exist is an additional capital gains tax included within the Affordable Care Act. There is a new tax on investment income which covers interest income earned, dividends, rents as well as capital gains. However, this new tax is not a transfer tax on real estate sales.

The only time a principal residence sale can be subject to this tax is when the following criteria come together:

1. If a married couple makes more than $250,000 or an individual makes more than $200,000 per year during the year their principal residence is sold, the seller’s gain will be subject to this surtax, if the $250,000/$500,000 exemption rule is exceeded.

2. If the seller is in the higher income bracket, the seller may still not be subject to this tax if the seller’s gain is less than $500,000 for a couple or $250,000 for an individual. It is a tax on a household with combined income of $250,000 or an individual earning more than $200,000 with a gain over the $250,000/$500,000 exclusion rule. The exclusion rule was passed during the Clinton Administration as codified in 26 USC 121 which simply means gain on the principal residence under $250,000/$500,000 is not subject to taxation. This exemption from taxation on gain under $250,000/$500,000 on the principal residence still remains in place at this time and therefore not subject to capital gains tax (currently at 15%). When the tax is applied, it is a surtax of 3.8% of the gain over the $250,000/$500,000. This is surtax on profit over the $250,000/$500,000 level but not a tax on the total sales price. Here is an example:

Mr. and Mrs. Smith sell their principal residence and realize a gain of $525,000. They have an adjusted gross income of $325,000 as it relates to this new tax.

  • Adjusted gross income (before adding the taxable gain of $25,000) $325,000
  • Tax gain once the $250,000/$500,000 rule is applied $25,000
  • New adjusted income (adding the $25,000 of gain) $350,000
  • Excess over the adjusted gross income of $250,000 for a couple $100,000
  • The tax on the lesser amount of $25,000 ($25,000 x .038) $950

If Mr. and Mrs. Smith had a gain of less than $500,000 on the sale of their principal residence, none of the gain under $500,000 would be subject to the surtax of 3.8%. Whether they pay a 3.8% tax on excess gain over $500,000 ($25,000) will depend on other components which affect their adjusted gross income. This surtax would be handled as an element of the client’s federal income tax return….FIRPTA or the Colorado withholding does not have any effect….the clients will be subject to the current tax law in the year they sell a principal residence.