All Texas home sales to be taxed at 3.8% … Fact or Fiction?

The great thing about the Internet is the vast amount of information available at your finger tips.  The bad thing about the Internet is not all the information is accurate.

A half-truth that has been flying around the Internet for a while now and probably will continue is all real estate transactions will be taxed at 3.8% in 2013.

If you knew a 3.8% real estate tax was on the way and you were thinking about selling your Spring Texas house, you might put your house on the market in 2012 to avoid the tax. But wait … don’t rush to list your house just to avoid a real estate tax until you learn the facts.

Here’s the FACTS:

  • Effective January 1, 2013, there is a new 3.8% Medicare Tax on investment income.
  • The tax is NOT a “real estate sales tax” NOR is it a “transfer tax”
  • The tax DOES NOT apply to every home sold.
  • Capital gain exclusion of $250,000 (for individuals) and $500,000 (for married couples) on the sale of a principal residence remains in place.
  • Individuals with an Adjusted Gross Income (AGI) of more than $200,000 or married couples filing a joint return with an AGI of more than $250,000 AGI are subject to the 3.8% Medicare Tax.  Individuals and married couples earning less than the respective $200,000 and $250,000 are NOT subject to the tax.

Real world example:

  • John and Mary sell their Spring Texas home which is their primary residence for $725,000. Their profit on the sale of their home was $525,000 (sales price – cost of selling – original purchase price – improvements).  John and Mary are high income earners with an AGI of $300,000.  John and Mary would be subject to the 3.8% Medicare tax.

Tax calculation: 

  • $525,000 profit – $500,000 capital gain exclusion = $25,000 subject to tax
  • $25,000 subject to tax * 3.8% Medicare tax rate = $950 tax.

For more examples of the 3.8% Medicare tax download a brochure from the National Association of Realtors. If you have further questions about the tax implications of selling your Spring Texas home, please consult your tax accountant.