There are so many scare tactics out there on this newly imposed 3.8% tax, I decided to write another article with some facts I found on Jay Thompson’s site, The Phoenix Real Estate Guy. Firstly, here is a link to the actual legislation and below is the section that seems to apply to this new tax:
SEC. 1411. IMPOSITION OF TAX.
(a) IN GENERAL.—Except as provided in subsection (e)—
(1) APPLICATION TO INDIVIDUALS.—In the case of an individual, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax equal to 3.8 percent of the lesser of—
(A) net investment income for such taxable year, or
(B) the excess (if any) of—
(i) the modified adjusted gross income for such taxable year, over
(ii) the threshold amount.
(2) APPLICATION TO ESTATES AND TRUSTS.—In the case of an estate or trust, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax of 3.8 percent of the lesser of—
(A) the undistributed net investment income for such taxable year, or
(B) the excess (if any) of—
(i) the adjusted gross income (as defined in section 67(e)) for such taxable year, over
(ii) the dollar amount at which the highest tax bracket in section 1(e) begins for such taxable year.
(b) THRESHOLD AMOUNT.—For purposes of this chapter, the term ‘threshold amount’ means—
(1) in the case of a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), $250,000,
(2) in the case of a married taxpayer (as defined in section 7703) filing a separate return, 1?2 of the dollar amount determined under paragraph (1), and
(3) in any other case, $200,000
Now trying to make sense of this is something I won’t and can’t do: However, Robert Freedman, Senior Editor of Realtor Magazine, says this:
Here’s how the tax works. For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. I say “might” because whether the tax applies or not depends on many factors having to do with the kind and amount of the investment income the household receives.
Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income.
Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.
The NAR (National Association of Realtors) has a brochure that gives examples how the tax might apply under eight different scenarios:
- sale of principal residence
- sale of a non-real estate asset
- gain, interest, and dividend from securities
- real estate investment income
- rental income as sole source of earnings
- sale of second home with no rental use
- sale of inherited investment property
- purchase and sale of investment property
Hopefully this helps.