The Facts on that Rumored 3.8% Sales Tax on Homes

Check out some new facts posted by the National Association of Home Builders:

Among the most common tax and housing policy questions we field here at NAHB is whether a 3.8% sales tax will hit home sales in 2013.

The answer is no.

Unfortunately, we’ve been tracking a set of emails that falsely claim that the 2010 health care reform legislation (which contained a burdensome 1099 reporting requirement, now repealed) imposed a 3.8% sales tax or transfer fee on all home sales in 2013. There is an element of fact underlying this rumor, but for the most part this claim is false.

The new tax added by the health care reform law is an add-on to existing taxes on capital gains and other ”unearned income” (dividends, rents, and interest). The new 3.8% tax is often referred to as a Medicare tax because its revenues will be dedicated to the Medicare Trust Fund.

For capital gains, presently taxed at a 15% rate, the gains rate would rise an additional 3.8 percentage points for high-income taxpayers, those with adjusted gross incomes (AGI) above $250,000 ($200,000 if filing a “single” return). Capital gains arise with the sale of capital assets, such as stocks, bonds, and real estate.
But importantly for home sales, the existing $500,000 / $250,000 gain exclusion for a seller of a principal residence continues to apply, so most principal residences sales will not be affected. Some second home sellers with high incomes may have to pay some additional capital gains tax to the extent that their AGI exceeds $250,000, but only on that portion of the gain that causes the taxpayer’s AGI to exceed $250,000 and only for the realized capital gain - not the actual sales price.

Consider the following, typical example. Suppose a married couple sells their principal residence for $500,000, after having purchased the home for $200,000. Suppose the capital gain on the sale is $300,000. The couple is allowed (under Section 121 of the Internal Revenue Code) to exclude from all tax (including the standard capital gains tax and the new 3.8% tax) up to $500,000 of gain, so there is no tax on the realized $300,000 gain from the home sale.

To be clear, the 3.8% tax is not in any way a sales tax paid against the sales price of the home for either the home seller or home buyer. Nor is it an additional business income tax for home builders selling a new home out of inventory.

The housing market has enough policy uncertainties today. We hope this false rumor concerning a 3.8% sales tax on home sales is not among them.

Source: https://eyeonhousing.wordpress.com/

A Slow Death for the American Dream

The American Dream of homeownership is very much alive in the minds of most Americans, according to a new poll commissioned by the National Association of Home Builders (NAHB), but if things continue as they have been lately in Washington it may be headed for a slow death.

The results from a survey of 2,000 likely voters in next year’s elections reveals a disturbing disconnect between the folks back home and those inside the Beltway who have been developing new housing policies in the aftermath of the recession. On the one hand, you have the majority of Americans who believe that owning their own home is as important in their lives as being successful at their job or being able to pay for a family member’s education. On the other hand, there are the policy makers who want to greatly reduce the federal government’s historic commitment to housing and turn its attention to other things. Those two views are on a collision course. It will be a real tragedy if Americans don’t wake up to the events that are unfolding until it is too late and they find themselves in a situation where it is tougher to buy a home than it has been for generations.

Conducted in early May by leading Republican and Democratic polling firms Public Opinion Strategies and Lake Research Partners, the NAHB survey found that an overwhelming 75 percent of the people responding said that owning a home is worth the risk of the fluctuations in the market. The same share said owning a home is the best long-term investment a person can make, and 95 percent of those who were home owners said they were happy with their decision to buy. Almost three quarters of those who don’t currently own a home said that homeownership was one of their goals. For the younger voters who are most likely to be in the market for a home in the next few years, the percentages were even higher.

Unfortunately, the heartland’s rampant enthusiasm for homeownership has gone largely unrecognized by those reframing the nation’s housing finance system. Obtaining a mortgage today is already more difficult than it was before the boom and bust period of the previous decade, and things could well get worse. A proposal by six federal agencies to set a minimum 20 percent downpayment standard for the most favorable lending terms would consign first-time buyers without substantial savings to higher borrowing costs and require them to have higher credit scores. Currently, mortgages insured by the Federal Housing Administration, with minimum downpayments of 3.5%, are about the only game in town for typical buyers just coming into the market. While FHA financing is a good fallback for cash-strapped home buyers, it too is vulnerable and may not be as widely available in the future.

Learning from the mistakes and excesses of the housing boom, the regulators should be implementing underwriting standards that ensure the borrower is able to repay the mortgage. That’s a common-sense approach to putting the housing finance system back on its feet. Over the years, the federal government has played an essential role in supporting the flow of housing credit to working middle-class families to enable them to own homes. Disengaging from that commitment, as many now propose, is hardly what the voters want or expect, and that is a good reason for not embarking upon a worrisome course away from homeownership.

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