FACT or FICTION? The 3.8% Real Estate Tax on Home Sales

FACT or FICTION?

The 3.8% Real Estate Tax on Home Sales.

There seems to be lots of misinformation being spewed out throughout on the Internet regarding the POTENTIAL 3.8% tax that would be imposed on SOME (not all) income generated from particular home sales (again not all).

* First allow me to start this off by stating, I am not a tax professional, nor do I ever attempt to play one on my Blogs or ever for that matter. As always, consult & address your tax questions with a licensed TAX PROFESSIONAL.

With that being said we can get down to the topic on this 3.8% tax.

Fact: Yes, effect January 1, 2013 there is a POTENTIAL 3.8% tax that will be imposed on some income generated from some home sales.

Fiction: No, it is NOT a "real estate transfer tax" nor a "Real Estate Sales Tax".

This 3.8% tax, in fact, will apply to a very few in a very few circumstances.

When you going over the actual legistion, it's easy to understand why so many people might misinterpret what this 3.8% tax is actually all about. Ahhh! I mean does this really make sense to you?

In simpler terms

Rather than spending precious time trying to rewrite the pages produced by Congress & others, I'll use SNOPES.com and the National Association of Realtors (NAR) to help  me.

It's a complicated section of a complicated piece of Legislation which since has been frequently misrepresented, rumored & reported as basically amounting to a 3.8% "sales tax on all real estate transaction". Which again is FALSE.

Off SNOPES.com you'll read from provisions of the recently passed Patient Protection Affordable Care Act (PPACA) heath care legislation which calls for high income households to be subject to a new 3.8% Medicare tax on investment income starting in 2013.  After which you'll read a simpler explanation & scenario.

It reads:

The PPACA creates a new code Section 1411, which will generally impose a 3.8 percent tax on the lesser of "net investment income" or the excess of modified adjusted gross income over a "threshold amount" (generally $250,000 for taxpayers filing a joint return, $125,000 for married taxpayers filing a separate return and $200,000 in all other cases). Net investment income generally means the excess of (i) interest, dividends, annuities, royalties, rents, income from passive activities, income from trading financial instruments, and commodities, and gain from the disposition of certain non-business property, over (ii) allowable deductions properly allocable to such income. In determining the amount of net investment income, special rules apply with respect to dispositions of equity interests in certain partnerships and S corporations, and to distributions from certain plans. This additional tax applies to taxable years beginning after December 31, 2012.

Click here: snopes.com: 3.8% Tax on Real Estate Transactions

Off NAR's you can read Senior Editor, Robert Freedman, of Realtor Magazine explain the matter further.

http://speakingofrealestate.blogs.realtor.org/2010/11/24/the-3-8-tax-is-not-a-real-estate-transfer-tax/

This is a complicated issue which will apply to very few people starting in the 2013 tax year although I hope you'll not allow yourself to be mislead or misinterpret the facts. Don't forget the Capital Gains Exclusion remains ($250k for a single person;$500k for a couple). And if you're concerned you'll be subject to the 3.8% additional tax IF you are in a high income bracket (making over $500k & meet other criteria) you might look to avoid it by selling before 12/31/2012 or using other approaches such as using the Stepped Up approach but again it gets complicated so ALWAYS consult your TAX PROFESSIONAL!

I hope this will help in some way to clear up confusion.

I'm sure that I'll be touching on this topic again on the blog as we move forward.

IT'S ALMOST TAX TIME AGAIN

TAX TIPS FOR HOMEOWNERS

Let Your Real Estate Holdings Give You Leverage

~

MORTGAGE INTEREST

You can deduct the interest you paid during the year.

 

CAPITAL IMPROVEMENTS

The cost of major improvements can be deducted from the taxable gain when you sell your home.

 

CAPITAL GAINS

If you sold your home last year, you can exempt the first $250,000 of profit ($500,000 for married taxpayers filing a joint return).

 

REPAIRS TO RENTAL PROPERTY

General repairs may qualify as deductions in the year they are paid for. Also be sure to keep track of major improvements as they are deductible when you sell or through depreciation.

 

MOVING EXPENSES:

If you moved because of change in your new Employer's location, or because you started a new job, you may be able to deduct some of your moving expenses.

 

POINTS

Points paid at the time of a purchase are fully deductible in that year. The points you pay when you refinance are deductible over the life of the loan, and any remaining unamortized points from the previous loan are able to be written off in that year.

 

*Please verify all information & questions with your tax preparer.

Smart Condo Upgrades

Conventional wisdom holds that you can never go wrong in adding upgrades to your condo, but not all upgrades are created equal. Will a top-of-the-line kitchen bring in more at closing than a luxury bathroom? Is it better to replace that worn shag with brand-new carpeting or polished hardwood? Which condo upgrades or renovations will pay off the most?

The specific answer depends on a variety of factors, including the location of your condo, the value of other condos in the neighborhood and the rate at which property values are changing, along with your own willingness to invest money in upgrades. It’s also important to consider the overall condition of your condo: Buyers won’t care about a spa bathroom with real Italian marble if the rest of the condo is in disrepair. Make sure your condo is in good shape overall before adding any improvements.

Your choices also may be limited by the restrictions placed on your condo building. Before you consider any upgrades, it’s important to read your condominium rules and bylaws carefully and check with your condo association about which upgrades are and are not allowed. Certain renovations may be prohibited, so it’s important that you understand your obligations and responsibilities as a condo owner before beginning any projects.

Keep in mind that not all improvements will greatly increase the resale value of your condo, since some upgrades add luxury without increasing worth. Above all, buyers want a home that has no deferred maintenance, newer appliances, modern conveniences and is ready to occupy. While there’s no hard and fast rule for which upgrades are best, there are some general guidelines that can help you decide which improvements may deliver the most bang for your buck.


MAJOR RENOVATIONS

Every year, the National Association of Realtors and Remodeling Magazine publish the Cost vs. Value Report (http://www.costvsvalue.com/) which features various home project costs and returns, broken down by regions and cities, and can give you a better idea of values in your area.

Kitchens

The kitchen has always been the heart of the home, so if you’re considering any improvements at all, look to the kitchen. A kitchen remodel generally returns more than 90 percent of its costs, making it one of the most valuable condo improvements. According to the Cost vs. Value Report, major high-end kitchen remodels don't return quite as much as the mid-range or minor kitchen remodels. Most buyers won't pay extra for a built-in Sub Zero refrigerator, imported tile or designer faucets when quality mid-range kitchen features will do. If you’re redesigning your kitchen, keep function in mind. Home buyers often look for a proper L-shape, U-shape or triangular work space.

Appliances & Cabinets

Appliances and cabinets are typically the most expensive items to replace in a kitchen, but they’re usually worth it. New appliances are a huge selling point for buyers. If your kitchen is outdated, invest in a new cooktop, stove or refrigerator. Studies show that sellers usually recoup nearly every penny they spend on appliances.

If your cabinets are in good shape and are painted, add a fresh coat of paint and new hardware.

But if your cabinets have seen better days, they’ll need to be fixed or replaced. If you can’t afford new cabinets, just get new doors and drawer fronts. Then paint everything to match and add new hardware. Resurfacing, which involves attaching a thin veneer to the surface of the cabinets and replacing the doors and hardware, is another good option.

Counter tops, sinks & faucets

Updated counters, newer faucets and sparkling sinks sell. Granite, marble, solid surface, concrete and stainless steel counters are a nice addition, if your budget allows. There are also plenty of less expensive options, such as engineered stone, ceramic tile, soapstone, wood or butcher block and laminates. Buyers don't want leaky faucets or stained sinks.

Bathrooms

The average recouped cost is more than 80 percent for bathrooms in condos. Stylish upgrades can make your condo a competitive option on the market. Consider new countertops, sinks and faucets, contemporary flooring, ample cabinetry, and room-enhancing light fixtures. If you’re not planning a total bathroom re-do, porcelain coating sprayed over old tile can freshen up a dull bathroom considerably, as can switching out old fixtures and hardware, repairing or replacing tile and giving the room a coating of good primer and enamel paint.


SMALLER CHANGES

Flooring

Hardwood Floors
Wood floors are a hot item today and an attractive feature to buyers. If your floor needs to be replaced, consider installing real hardwood, if your budget allows it, or a plastic laminate or engineered hardwood alternative, which are less expensive. If your home has hardwood floors hidden beneath carpeting, it would pay to have the carpeting removed and the floors refinished. And if your existing hardwood is damaged, it would likely pay to have it repaired.

Carpeting
Dingy or worn carpeting can be a turnoff for buyers. If the problem can’t be fixed by a good carpet cleaning, replacement is probably your best bet. If your sub-floor is plywood, replace the carpeting with light tan. Neutral carpeting is your best bet for resale, so resist the urge to put your favorite color wall-to-wall.

Ceramic
Replace chipped or cracked tiles, and clean or replace the grout. Total replacement can be pricey, so you may want to consider repairing tiles or installing an alternative flooring material.

Ceilings & Walls

Painting
Buyers spend more time than you would think staring at ceilings. They’re looking for signs of a leaky roof, so you don't want them to see stains or cracks. Ditto for walls. Nothing says freshness like new paint. It’s one of the least expensive ways to make your home more attractive, and it’s also one of the easiest. Use fiberglass tape on large cracks, cover with joint compound and sand. Paint a neutral color such as light tan – think of coffee with cream. Avoid bold or unusual colors. Buyers won’t be interested in your condo if they know they’ll need to do all the work to paint over your Barbie-doll pink bathroom.

Textured ceilings
Older popcorn ceilings with the "sparkles" often contain asbestos and can be health hazards if disturbed. Say goodbye to it. Even recently sprayed ceilings turn off buyers. It's not expensive, but it is time consuming to remove. Lay down drop cloths and scrape it off. You will need to repaint.

Wallpaper
Buyers don’t hate all wallpaper; they just hate your wallpaper. It’s your personal choice, not theirs, so get rid of it – especially if it’s dated. The easiest way is to steam it off by using an inexpensive wallpaper remover steamer. Then paint the walls a creamy neutral.

Storage
Storage sells homes. It is the first thing that people look at, besides the kitchen and bathroom. Add storage whenever possible. Built-ins are an especially attractive addition.


MORE RESOURCES

Cost vs. Value Report:

http://www.costvsvalue.com/

Remodeling cost calculators:

http://www.contractors.com/h/info/resources.html

http://www.costestimator.com/hgtvkitchen/index.jsp

CONDO/PUD/Subdivision Lookup

The Condo/PUD/Subdivision Lookup function allows users to search for Condo, PUD, or Subdivision by location, name, or status.
New rules are in effect for Condominiums. Please read the following carefully.http://www.hud.gov/offices/hsg/sfh/f17c/f17cond_xmlhlp.cfm

What would you do with $308Million? Tour the most expensive Penthouse ever sold.

Battle Brews over Union Station- Downtown Denver

http://www.denverpost.com/business/ci_17210473?source=rss

Cruising Condominiums? Floating Condo community planned to be based in Houston, TX.

Floating Condominiums? Developer is proposing 180 unit vessel community that would be based in Houston. Check it out http://www.chron.com/disp/story.mpl/business/realestate/7403558.html

A work in progress! Be patient please.

Well I'm launching a blog that will be devoted to news & reviews on Denver's condominium, loft, & townhome market primarily within Central Denver's neighborhoods.

I hope it will also serve as a resourcefor anyone living the condo lifestyle.

I hope you'll check it out & follow!

Thanks!

Peter Balcomb
Specializing in Denver's condominium market for over 18 years!