You have no doubt heard about the 3.8% tax that is part of health care reform. There is a lot of misinformation floating around the web and in mass emails being shared. We want our clients to be informed so that they can put the rumors to rest about the infamous 3.8% tax. Here is what you need to know:
- If you can add up all of your income from every possible source for the year and it equals less than $200,000 ($250,000 on a joint tax return), this tax will NOT effect you.
- You will NEVER pay this 3.8% tax at the time that you purchase a Knoxville home or other Knoxville investment property, as it will never be collected as a transfer tax on Knoxville real estate.
- You will NEVER pay this tax at closing when you sell your Knoxville home or investment property. Any profit you gain over the exclusion threshold at settlement is just added to your gross income for the year.
- If and when you sell your PRIMARY residence, you still receive the full benefit of the gain exclusion on the sale of your Knoxville home $250,000 (single tax return)/$500,000 (married filing joint tax return). Only if your capital gain (profit) on the sale is greater than these amounts will you then include any gain above these amounts as income on your tax return. However, if your total income (including this gain above the exempted amount on your residence) is LESS than the $200,000 (single)/$250,000 (joint) amount, you will NOT pay this tax.
- The tax is not only for Knoxville real estate gain, but it applies to other types of investment income as well. If your income exceeds the $200,000 (single)/$250,000 (joint) amount, then the tax will be applied to capital gains, interest income, dividend income and rental income (after expenses).
- No matter how much you make in other types of income, if you have NO income from capital gains, rents, interest or dividends, you’ll NEVER pay this tax.
- The equation that figures the amount of 3.8% tax due will ALWAYS protect $200,000 ($250,000 on a joint return) of your income from the 3.8% tax. (i.e. If you are single and have a total of $205,000 income, the 3.8% tax would NEVER be enforced on more than $5,000).
If you are anything like me, sometimes it is easier to understand a concept when you hear someone talking about it instead of reading the facts. Below is a video pretty much summarizing what you’ve read above as well as an informative video explanation of the 3.8% tax produced by the National Association of REALTORS featuring their Director of Tax Policy. For additional information here is a link to a brochure on the 3.8% tax provided by NAR.