Health Care Reform Impacts Home Sales            March 28, 2010

By Alan Zukerkorn, Hawaii Mortgage

What?  How can these two things be connected?  One of the provisions of the new law is a 3.8% surcharge tax on capital gains.  When you sell a property held for more than one year, the profit made on that sale is treated as capital gains income.

When you sell your primary residence you have two options to avoid capital gains taxes.  The first is to purchase a replacement property for the same or higher price than the one you are selling.  The other option allowed by the tax rules is a one-time lifetime exemption of $250,000 per person, or $500,000 per married couple on gains from the sale of your primary residence.

If you have already used your lifetime exemption, choose not to use it, or your gains are more than your exemption, you will be hit with higher taxes.  The tax rate until this week was 15%.  With the stroke of the President’s pen this week, The Healthcare Reform Law increased that rate by more than 25% to the new rate of 18.8%.

Here’s an example to illustrate the impact:  John and Mary Wilson bought their Hawaii Kai home in the early 70’s for $52,000.  Now retired, they are moving to Las Vegas because with their fixed income, they can no longer afford to live in Hawaii.  Their home sells for $812,000.  Their capital gains are $760,000.  Even with their one-time lifetime $500,000 exemption, they will still have to pay taxes on $260,000.  Under the old tax rate, they would owe $39,000 in taxes.  As of this week, their tax bill increased almost $10,000 to $48,880.  Want an even scarier thought?  Congress must vote soon to keep the 2001 Bush tax cuts in place or they will return to the higher rates before 2001.  Prior to 2001 the capital gains tax rate was 45%.  Yes, the 3.8% Healthcare tax surcharge would be added on top of that for a total tax rate of 48.8%.  If the tax cuts are not extended, the tax bill for the Wilson’s would jump to $126,880.

Whatever your flavor of politics, everyone in the real estate and mortgage industries all agree that additional taxes levied on a segment of our economy that has still not recovered is not a good thing.  This newsletter has never taken a political stance, but at some point everyone has to say enough!  A majority of Americans did not favor this legislation, and currently 62% of us want the law repealed.  Become informed about the positions those you are voting for take.  Shed party lines in November vote for what is best for our economy and country.