ObamaCare and the Sales Tax on House Sales

One little known aspect of the contentious health care bill passed recently in Congress is a “sales tax on the sale of a home.” Like everything else about this bill, it is being spun by both sides for maximum political gain. The fact of the matter is that it will affect few Americans, but physicians could likely be affected, particularly those who move out of a long-term home before they retire or right at retirement.  The tax is actually an increase in the capital gains tax.  The way the capital gains tax works in most physician tax brackets is that you pay 15% of any long-term gains in taxes.  This applies to stock market gains and real estate gains.  Real estate gains, however, have a significant exemption for your primary home.  The first $500K in gains ($250K if single) are tax free.  That means if you buy a house for $500K, and over the years it appreciates to $1.1 Million, when you sell it, you'll pay $15K in capital gains taxes.  (If you sold it for $900K you wouldn't pay a dime.)  The health care bill would increase the tax bill on that $1.1 Million home to $18,800 from $15,000, but only if your income that year is $250K or more.

Personally, I think the capital gains tax is quite unfair.  It isn't that I don't think capital gains should be taxed.  I just think you should be taxed on the real (after-inflation) gains, not the nominal gains.  So what if your investment doubled in value in nominal terms over 30 years if everything else did too?  There's no real gain there.  It's just another way to collect taxes.  I think the way the tax ought to work is that the tax bill on long-term gains goes down the longer you hold it.  Perhaps 15% after one year is okay, then 10% after 3 years, 5% after 5 years, and 0% after 10 years.  Or there could be a table that allows you to adjust the value for inflation before applying the 15% tax rate.

At any rate, this increased tax is scheduled to kick in in 2013.  So if it looks like it might apply to you, keep it in mind.  You may be able to avoid it by not taking any other capital gains from your portfolio, not selling two rental properties in one year, or just waiting until a year after retirement (when your taxable income goes down) to downsize.

Who's really going to get nailed on this tax?  Single docs (only need $200K in income to qualify for it, and you only get a $250K exemption on the house gains) living in expensive housing markets (easier to have $250K in gains when the house started out worth $1 Million than when it started out worth $200K) who live in the same house for years (to get those gains).  What kind of behavior are we trying to promote here?  Getting married?  Working less?  Becoming long-term homeowners?  This tax won't raise a significant amount of money, but it will continue the trend of making our tax code more and more complicated each year.