3.8% Tax Update: Fact v.s. Fiction

Three has been a lot of hype in the real estate world regarding the 3.8% tax associated with the Obama administration’s Healthcare Act. A lot of this hype sounds rather scary for a homeowner who is considering selling their home, or for a buyer who can’t afford additional costs added to their closing costs.

As Realtors, we are members of the National Association of Realtors (NAR), which is a great resource for us whenever we have questions from our clients. As we have heard concerns regarding this tax issue, we thought that it would be a good time to present to you the top 10 things that you should know about the 3.8% tax according to NAR. Hopefully this list will help to sort the facts from the hype.

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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.

The bottom line is that very few homeowners will ever have to think about, or be concerned with paying this tax. The best advice is what we tell our clients to do whenever there are questions about tax implications in a real estate transaction. That advice is, consult your tax professional.

For a more detailed rundown of what the NAR’s position is on this legislation, refer to the handout attached to the link below.

NAR’s Official Handout

Riverside’s Mid-Century Homes

The Ransom-McKenzie Team has represented a number of Riverside’s Mid-Century gems this year.  We discuss the historic significance of this style of architecture in our most recent Your Villa feature article.  To view the article and the fabulous pictures which accompany it, click on the caption below.

Riverside’s neighborhoods have  surprises around every corner, you just need to know where to look.  Give Connie & Charlotte a call if you would like us to help with your next Riverside real estate adventure.

Great News Riverside!

As we mentioned in our posts on Tuesday and Wednesday this week, the real estate market in Riverside is looking up.  We’ve seen increases in confidence, pricing, and lending over the past few months.

As if to validate our assertions, the NAR reports came out at the end of the week stating that we were right.  Well, OK, they did not name the Ransom-McKenzie Team directly, but they did confirm what we have been seeing in the market place.  As artists, we are very visual people and we know that some of our readers must be too, so here is a great visual to wrap up this week’s good news.

We’re looking forward to more good news in the coming months!

Finding Your New Home

The image below was created by the California Association of Realtors (CAR) based on data they collect from buyers, sellers and agents.  Even though it is a Statewide picture of the real estate market, we thought it was a very pertinent visual about what the Real Estate market is looking like in Riverside and the Inland Empire these days.  The number we like the best is the one which states that 80% of buyers today have found their new home using a Real Estate Agent!

The internet is a fabulous tool for home buyers who want to know what is out there in the market place.  However,  in today’s market, the home you find on the internet has a likely chance of being sold by the time you see it online and try to get an appointment to see the property.  It is not that sites such as Redfin, Realtor.com, and Zillow are slow to get the information.  The fact is, those sites are directly linked to our MLS sites making them quite accurate.  But the reality is that our inventory of homes to sell is very low right now.  This means that  homes that are priced right, and are ready to sell often have multiple offers only hours after being listed.  (Sometimes even before they are showing up online.)  As a home buyer, you’re going to be better off having an agent help you with the process of finding your new home.  Not only will their knowledge and expertise be invaluable in negotiating you into a contract, but they will also be able to give you a heads up when potential homes come on the market.

We also found the fact that buyers are looking at fewer homes before they find their “dream house” these days to be an interesting statistic.  Part of that is because it is easier to narrow down the prospects through internet searches which provide details and pictures of the listings available.  But a greater factor is that there are not very many homes on the market right now.  The good news in this scenario is that, thanks to the laws of supply and demand, home prices are going up.  Market data from CAR shows that in June of 2012 our median sales price for existing homes was $219,850.  This figure is 8.3% higher than June 2011’s median price of $202,910.  Great news for sellers!

When we’re out and about in Riverside talking to friends, clients, and neighbors we’re finding that people are surprised to hear this information.  That’s why we’re putting it out there.  The real estate market in Riverside is busy right now!  Give us a call if you would like more information, or send us a comment to keep the discussion going.

Real Estate in Riverside

Homes ARE Selling!

We’re excited about where the real estate market is headed in Riverside.  Over the past 6 months or so, we have seen activity in the marketplace soar.   There is a sense of optimism that we are seeing from both our buyers and sellers.
With interest rates at an all time low, it is a fabulous time to buy.  However, on the flip side, with inventory so low, it is also a great time to sell your home quickly. Check out this Wall Street Journal article which points out that “if you can buy a home today, you can save the difference it would cost you to rent even if you stay in the home just five years.”

Homes, such as this listing we had on Hawarden,  are selling before being public on the MLS.

Here in Riverside, well priced homes are experiencing multiple offers, and the sellers are feeling confident that their home will bring in a fair market value.  Prices have been creeping up in many neighborhoods in town which is very exciting.  Most of the business is in the mid 200 to high 300 thousand dollar range, but we’re also starting to see things move in the higher price ranges as well.  Even jumbo loans have historically low interest rates! We’ve also had sales recently from homes that we listed which sold before ever being entered into the MLS!

If you have friends, family or work associates who are looking to make a change or need real estate advice, be sure to have them call the Ransom-McKenzie Team.  We encourage you to post your questions right here on our blog for a fun, interactive conversation about our business.  Let’s get the conversations started!