Dispelling the Myth - There is NO 4% "Sales Tax" Being Imposed on Home Sales

Contrary to reports and newspaper articles circulating widely on the Internet, there is not a 4% "sales tax" or "transfer tax" on the sale of a home included in the health care reform bill. There are no changes to existing real estate tax laws as a result of this legislation.

What was included in the health bill is a provision that imposes a new 3.8% Medicare tax for some higher income households that have "net investment income." This new tax will apply to households with Adjusted Gross Income (AGI) of more than $200,000 for individuals or more than $250,000 for married couples. Since capital gains are included in the definition of "net investment income," an additional tax obligation might result from the sale of real property.

In the case of the sale of a principal residence, the existing $250,000/$500,000 exclusion from capital gains on the sale of a principal residence remains unchanged. Consequently, even when the AGI limits are met, the new tax would not be applied to all capital gains that result from the sale of a home. Rather, it would only apply to any home sale gain realized in excess of the $250K/$500K existing primary home exclusion that pushes the filer's AGI over the $200K/$250K adjusted gross income limit.

The new Medicare tax will take effect January 1, 2013.