As part of the health care legislation, a new 3.8 percent tax will be imposed on some people starting in 2013. Contrary to rumors among some real estate practitioners, this is not a tax on the sale of a home. Neither a home-buyer nor home-seller will have to fork over $3,800 to the federal government on the sale of a $100,000 home.
This tax, however, will impact some landlords and some homeowners who have significant housing equity. Rental incomes will be subjected to this 3.8 percent tax on landlords who earn more than $200,000 a year. For example, a corporate lawyer who has a high salary but who also owns a rental property will likely be subject to this tax. But as with most taxes, those who have to fork over the money to the federal government and those who actually suffer the burden of the tax will not be the same. The right question to ask is: how much of this tax on rental income will get shifted to tenants as a rent hike?
As an illustration, consider a simple sales tax. Retail stores are the ones sending the tax dollars to the government, but the consumers are the ones who get squeezed. A $100 bag of groceries without tax suddenly becomes a $104 bill with a 4 percent sales tax.
Now consider the following example where consumers do not get hurt because tax shifting is impossible. Georgia is the Peach State but to its dismay South Carolina overtook Georgia last year in peach production. Surely South Carolina producers must have cheated in some way. So let’s impose a tax on peach growers in South Carolina and only for this state. This hypothetical law, though clearly unconstitutional, provides a good illustration of the tax shifting impact. If the peach price at your grocery was $2 per pound before this tax, then the peach price after the tax will still be $2 per pound because consumers will have shifted to buying Georgia peaches. South Carolina farmers who try to raise the price to $2.50 will attract no buyers and will go bankrupt. So they have to match the price of Georgia peaches while cursing the federal government. Consumers are not impacted but South Carolina producers are.
Going back to our original question: how much of the 3.8 percent health care tax on rental income will get shifted to tenants as a higher rent? It will depend on what economists call elasticity of supply and demand curves. The possibilities are:
- If tenants have many options – like living in their parent’s basement or taking on a third roommate – then the tax burden will reside with landlords and not renters.
- If tenants do not have many options – after getting tired of parent’s nagging or the loud third roommate – then landlords will witness a strong demand for their rental properties and can raise rent.
- If landlords have many options – like getting out of the rental property business and buying stocks instead – then fewer rental properties will be built over time and fewer rentals will be available, thereby resulting in higher rent for tenants.
- If landlords do not have many options – because of an unwillingness to dump properties on to the market in order to avoid the capital gains tax or because of an historic attachment to the property – then the landlord will bear the tax.
The actual outcome will depend on the above four possibilities. It is very hard to quantify the actual magnitude of the tax shift. However, as can be seen, we should not assume that the 3.8 percent tax is only for top income households. Some of the lower income renters could easily face higher rents.
Details of the 3.8 percent tax are provided here (PDF). It contains only the incidence of the tax and does not feature any particulars of the tax shifts into rents.
Does the 3.8% tax on rental income include rents on commercial properties. We lease commercial properties that have pre determined rents for 25 or more years. There is no way that we can pass this on to the tenants.
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Do you really think this administration cares if your client has to absorb this cost rather than pass it through to the tenant ? Don’t forget, we need to “redistribute the wealth’
[...] The Impact of the 3.8% Tax on Rents [...]
[...] resources available from the National Association of Realtors:NAR’s Official HandoutThe Impact of the 3.8% Tax on RentsHope all three help you shed light on the subject.By The KCM [...]
[...] The Impact of the 3.8% Tax on Rents [...]
This IS a tax on the sale of real estate, quite a bit of real estate, and a huge part of what I sell. I don’t know why we keep spinning this to the public as no big deal, it is a national transfer tax on many types of properties.
My suggestion to real estate agents that sell commercial, investment, and second homes would be to brush up on irc 1031 like kind exchanges. With the Bush tax cuts likely expiring, the amount of tax increase to sell a property other than your primary home will go up, in some cases to 30% to 40% more than they are now in 2012.
But hey, it’s not a tax on real estate………………..
[...] By The KCM Crew on September 25, 2012 We have previously reported on the questions surrounding the existence of a 3.8% tax in the administration’s health care program. Today we want to update the post in order to help further explain the issue. – The KCM CrewHere are the 10 Things You Need to Know About the 3.8% Tax according to the National Association of Realtors (NAR):1.) When you add up all of your income from every possible source, and that total is less than $200,000 ($250,000 on a joint tax return), you will NOT be subject to this tax. 2.) The 3.8% tax will NEVER be collected as a transfer tax on real estate of any type, so you’ll NEVER pay this tax at the time that you purchase a home or other investment property.3.) You’ll NEVER pay this tax at settlement when you sell your home or investment property. Any capital gain you realize at settlement is just one component of that year’s gross income.4.) If you sell your principal residence, you will still receive the full benefit of the $250,000 (single tax return)/$500,000 (married filing joint tax return) exclusion on the sale of that home. If your capital gain is greater than these amounts, then you will include any gain above these amounts as income on your Form 1040 tax return. Even then, if your total income (including this taxable portion of gain on your residence) is less than the $200,000/$250,000 amounts, you will NOT pay this tax. If your total income is more than these amounts, a formula will protect some portion of your investment.5.) The tax applies to other types of investment income, not just real estate. If your income is more than the $200,000/$250,000 amount, then the tax formula will be applied to capital gains, interest income, dividend income and net rents (i.e., rents after expenses).6.) The tax goes into effect in 2013. If you have investment income in 2013, you won’t pay the 3.8% tax until you file your 2013 Form 1040 tax return in 2014. The 3.8% tax for any later year will be paid in the following calendar year when the tax returns are filed.7.) In any particular year, if you have NO income from capital gains, rents, interest or dividends, you’ll NEVER pay this tax, even if you have millions of dollars of other types of income.8.) The formula that determines the amount of 3.8% tax due will ALWAYS protect $200,000 ($250,000 on a joint return) of your income from any burden of the 3.8% tax. For example, if you are single and have a total of $201,000 income, the 3.8% tax would NEVER be imposed on more than $1000.9.) It’s true that investment income from rents on an investment property could be subject to the 3.8% tax. BUT: The only rental income that would be included in your gross income and therefore possibly subject to the tax is net rental income: gross rents minus expenses like depreciation, interest, property tax, maintenance and utilities.10.) The tax was enacted along with the health care legislation in 2010. It was added to the package just hours before the final vote and without review. NAR strongly opposed the tax at the time, and remains hopeful that it will not go into effect. The tax will no doubt be debated during the upcoming tax reform debates in 2013.Additional ResourcesOur Original KCM Blog PostNAR’s Official HandoutThe Impact of the 3.8% Tax on Rents [...]
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NAR has prepared a new guide, Top 10 Things You Should Know about the 3.8% Tax. (http://www.realtor.org/topics/health-care-reform/top-10-things-you-need-to-know-about-the-38-tax)
The tax is NOT a transfer tax on real estate sales and similar transactions. Not long after the tax was enacted, erroneous and misleading documents went viral on the Internet and created a great deal of misunderstanding and made the tax into something far more draconian than the actual provisions.
The new tax does NOT eliminate the benefits of the $250,000/$500,000 exclusion on the sale of a principal residence. Thus, ONLY that portion of a gain above those thresholds is included in AGI and could be subject to the tax.
REALTORS® should familiarize themselves with the tax, but should advise upper income clients or clients who have a large capital gains to seek the guidance of a tax professional. The amount of tax will vary from individual to individual because the elements that comprise AGI differ from taxpayer to taxpayer.
[...] The Impact of the 3.8% Tax on Rents [...]
[...] The Impact of the 3.8% Tax on Rents [...]
[...] 586-4790More About SaraRelated LinksNational Associaiton of Realtors Health Care Tax ArticleImpact of 3.8% Health Tax on Rental IncomeKeeping Curent Matters Health Care articleBlog TagsHealth Care Tax on Real Estate (1) Print [...]
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[...] The 3.8% Tax Impact on Rents, an article written by NAR Chief Economist Lawrence Yun. [...]