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The New Health Care Law and Taxes on Home Sales

Your questions answered

by Susan Jaffe, AARP Bulletin, October 11, 2010 | Comments: 0

home sales

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Q. Is there a big new tax on home sales that is supposed to raise money to pay for health reform?

A. Readers from South Carolina to Washington state report there's an e-mail going around warning about the dire consequences of a new real estate tax included in the health reform law. They worry that more taxes will make it tougher to sell their homes. But the information they received leaves out some key details, including the fact that most people won't have to pay it.

It's true that, starting in 2013, the health reform law adds a 3.8 percent tax on unearned income such as investment or rental income, or the profit from the sale of a home. But there are two important exceptions to the tax: You only pay taxes on profit from a home sale above $250,000 for single people or $500,000 for couples. And the tax applies only to those wealthy Americans with individual incomes over $200,000 or over $250,000 for couples.

Plus, there are other criteria before the tax applies: The home sale must produce a profit, so any home that is "underwater" is exempt. Ranches and farms are also exempt, as are properties used for business.

If you don't meet all criteria, you don't pay the tax.

The money from this tax will help support the Medicare program.

The tax was designed to affect a very small minority of homeowners. Only about 4 percent of American households earn over $200,000 a year, according to the latest statistics from the U.S. Census, and 2 percent have incomes $250,000 and higher. So, at most, 4 percent of American households will face the health care tax. In addition, half of all existing homes sold for $178,600 or less, according to the latest figures from the National Association of Realtors. So most home sales do not produce a profit that could trigger the tax.

"We have been fighting the same rumor over and over that certain political groups have put out about this 'outrageous' tax," says Lucien Salvant, a spokesman for the association, which represents 1.1 million Realtors. "The vast middle class of folks are not going to be hit by this tax when they put their house up for sale."

For more details and examples of how the new tax is computed, go to the Realtors association website.

Susan Jaffe of Washington, D.C., covers health and aging issues and writes the Bulletin’s weekly column, Health Care Reform Explained: Your Questions Answered.

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