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Sales tax on homes explained

Posted September 11, 2013 in Advice Column, Clive

Our firm handles many real estate transactions. Important legal issues arise when you sell your home. Competent legal counsel can protect your interests when you buy or sell property.

We have been asked by some clients about the new 3.8 percent sales tax on home sales contained in the Patient Protection Affordable Care Act. This general statement is not accurate. While all real estate transactions were once subject to capital gains tax, there is now an exemption for the sale of a primary residence. Rental property, commercial real estate and homes that don’t meet the criteria of a principal residence are still subject to tax. In general, no tax is owed for most sales of real estate if certain criteria are met.

First, the real estate must be your principal residence. If you owned the property and used it as your home for at least two years out of the last five, the property qualifies as a principal residence. Second, the sale must be the only sale of a principal residence in the last two years. Third, the property cannot have been used for business or rental purposes.

Finally, if the gain is less than $250,000 for a single individual or $500,000 for a married couple, no tax is owed. It is important to remember that this is gain, and not the sales price. If you and your spouse purchased a home for $300,000 and sold it for $600,000, the transaction is excluded because the gain ($300,000) is under the limit for a married couple.

The Patient Protection Affordable Care Act does include a 3.8 percent tax on investment income for individuals making more than $200,00 per year or married couples earning more than $250,000 per year. However, the tax only applies to long-term gain above the exclusion limit for the sale of real estate. If you and your spouse purchased a home for $300,000 and sold it for $900,000, the gain is $600,000. But the amount over the exclusion limit of $500,000 for a married couple is only $100,000. Only the gain is subject to the new tax, and then only if the household has income of more than $250,000.

It is a myth that there is a new 3.8 percent tax applied to all real estate sales. The tax only applies to high-income individuals who have substantial gain in the sale of a primary residence.

Information provided by Ross Barnett, attorney for Abendroth and Russell Law Firm, 2560 73rd St., Urbandale, 278-0623, www.ARPCLaw.com.

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