There is No Health Care Tax on Most Home Sales. Really.

By :: April 2nd, 2012

It is the unfounded rumor that never dies: You will have to pay a 3.8 percent federal health care tax on the sale of your house.

For all but a handful of taxpayers, this is not true. It is wrong. It is urban myth. It is the revenue equivalent of death panels or the Halliburton conspiracy to start the Iraq war.

This is one of those seemingly immortal Internet stories. You know the ones: They usually start with the assertion that, “They don’t want to know this but….” In the words of one blogger, “Obamacare will impose a 3.8 percent tax on all home sales and real estate transactions.”

Umm, no it won’t. Yes, the health law will impose a 3.8 percent tax on investment profits and other non-wage income starting in 2013. But that tax applies only to couples with adjusted gross income of $250,000 (or individuals with AGI of $200,000). About 95 percent of households make less than that, and will be exempt from the law no matter what.

In addition, couples who sell a personal residence can exclude the first $500,000 in profit from tax ($250,000 for singles). That would be profit from a home sale, not proceeds. So a couple that bought a house for $100,000 and sold it for $599,000 would owe no tax, even under the health law.

If that couple had AGI in excess of $250,000 and made a profit of $500,010, it would owe the new tax. On ten bucks. That would be an extra 38 cents.

The Tax Policy Center figures that in 2013 about 0.2 percent of households with cash income of $100,000-$200,000 would pay any additional tax under this provision. And they’d pay, on average, an extra $235. Keep in mind that is added tax on all sources of non-wage income, not just home sales.

Still, like Dracula, this rumor can’t be killed. Politfact tried to knock it down in 2010.  A couple of months ago, my Tax Policy Center colleague Donald Marron did the same in a Tax Notes article called “Health Reform’s Tax on Investment Income: Facts and Myths.”

People who send Internet chain letters probably don’t read Tax Notes.  Still, imagine Donald’s surprise when just last week he met a guy in Kansas City who insisted that the tax not only exists, but the rate is 7 percent (some sort  of weird bracket-creep, I guess).

Now imagine my surprise when, after I wrote a TaxVox article the other day about the (real) tax provisions of the health law, I got an email from a frustrated housing industry tax specialist. “There is usually some confusion/disinformation associated with new tax rules,” he wrote, “but I’ve never seen an issue that has as much as this one.”

So the bottom line is this: If you are a married couple whose AGI exceeds $250,000, and if you make more than a $500,000 profit from the sale of your house, yes, you may owe this tax. But if you are anybody else, spend your time worrying about how you’re going to win the next $600 million lottery—or whether you are going to get bopped in the head by a stray asteroid on your way to work.

20Comments

  1. Michael Bindner  ::  8:20 am on April 2nd, 2012:

    Very true. However, more and more investors who have left the market are buying foreclosed properties in hopes of getting rental income (already taxed) and capital gains when they are eventually sold. These are not poor people making these investments and selling an investment property that was foreclosed upon for a fair price in ten years will be entirely taxable on gains – no $500,000 exemption – although I suspect many will lie about living there – or will move in for a bit before selling. Since the income limit is not indexed, families who were making $150,000 now may well be making $200,000 by the time the market recovers. A $150,000 investment property profit would make their AGI $350,000 – and $100,000 would be taxed. This is not to say I would consider this a bad thing.

    This circumstance may serve as an impetus for the introduction of consumption taxes to fund health care, replacing the current tax on non-wage income, which effetively introduces a consumption tax – especially if companies held by the people who raise these taxes prioritize maintaing the real income of their investors and have the economic power to raise prices (in monopolistic markets) or lower wages (in monopsonistic markets) in order to do so.

    Investors with economic power may succeed in effectivly transfering their higher payroll tax obligation into a VAT or corporate income tax.

  2. Michael Bindner  ::  8:25 am on April 2nd, 2012:

    This possiblity may change how you model this tax. The extent to which payers can transfer the impact of paying it to customers is the extent to which the tax is already a VAT and is paid by customers or employees rather than owners – messing up your distributional analysis.

  3. Michael Bindner  ::  8:36 am on April 2nd, 2012:

    While pointing this out should be the grounds for getting hired to TPC, I would hate to have to model the second order effects of this tax on consumers and workers. You would have to model this on the same basis you attempt to model who pays corporate income taxes – which is debateable and hard to find empirical data on. Of course, passing this levy to workers and consumers may have exactly the same distributional effect – it depends on the industry and the customer. For example, investors in Lockheed Martin may have to eat the tax, or if they can transfer the obligation to the company, their employees might. I find it hard to believe that their customer will, since the customer has monopsony power.

  4. Jack B  ::  8:54 am on April 2nd, 2012:

    The urban myth might come true if meaningful tax reform ever comes to pass and the sale of personal residence tax expenditure goes away.

  5. Public Service Announcement: There Is No Health Care Tax on Home Sales « Donald Marron  ::  9:12 am on April 2nd, 2012:

    […] Gleckman explains over at TaxVox: Yes, the health law will impose a 3.8 percent tax on investment profits and other non-wage income […]

  6. AMTbuff  ::  12:29 pm on April 2nd, 2012:

    The Section 121 $250k/$500k exclusion has never been indexed for inflation since in enactment in 1997. In real terms its value will continue to erode until a substantial percentage of long-time homeowners become subject to tax on inflation-driven gains. This will be especially harsh if the Fed decides to permit high inflation as a method of partial default on the federal debt.

    As of today, Howard is correct. Ten years from now the situation will be very different unless the law changes favorably. Prompt legislation indexing the exemption levels would solve this problem. That will not happen because politicians do not benefit from stealth tax decreases.

  7. Vivian Darkbloom  ::  12:51 pm on April 2nd, 2012:

    That would be a meaningful reform, indeed. There is no reason the tax code should give preference to gains from the sale of a personal residence that it does not give to investment gains, or even gains on other personal assets.

    Alas, the Medicare tax on “unearned income” is just another obstacle to that reform.

  8. jim  ::  2:24 pm on April 2nd, 2012:

    you can believe this if theres any way they can suck a penny from you they will.

  9. Private Equity Tax Break Won’t Apply to Health-Care Levy – Bloomberg | Xtax  ::  12:06 am on April 3rd, 2012:

    […] cases where property values have risen dramatically, the tax would apply to profits from home sales. The […]

  10. Ralph H  ::  2:48 pm on April 3rd, 2012:

    This just points out the stupidity of our tax laws. Presuming an investment in a company brings jobs, why tax that more than a Mcmansion profit? no wonder the Chinese are kicking our butts economically.

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    […] cases where property values have risen dramatically, the tax would apply to profits from home sales. The […]

  12. Private Equity Tax Break Won’t Apply to Health-Care Levy | Natural Cosmetic Guide – natural cosmetic beauty tips and advice  ::  11:39 pm on April 4th, 2012:

    […] cases where property values have risen dramatically, the tax would apply to profits from home sales. The […]

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  14. winona  ::  6:15 am on April 29th, 2012:

    Most people who sell their homes will not be impacted by these new regulations. This is not a new tax on every seller, and that correction needs to be made. This tax is aimed at so-called “high earners” – if you do not fall into that category you will not pay any extra taxes upon the sale of your home.

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  15. Musings on Economics, Finance, and Life!  ::  2:34 pm on December 13th, 2012:

    […] As Howard Gleckman explains over at TaxVox: […]

  16. Bonita Posto  ::  1:59 am on January 10th, 2013:

    In Detroit in 1982, I saw the pre-production sketches of Chrysler’s minivans. I thought “Ugh! Those never will sell.” Boy, was I ever wrong! And what do I now have in my “collection”? The vehicle which “mopark” mentioned above, a 1989 Dodge Caravan LE with the 2.5L turbo and 5-speed manual (34,000 original miles). I agree with those who state that the Hershey show should continue to evolve. This is not AACA, friends.

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