By Mike Colpitts
A U.S. tax on the sale of high end homes is likely to go into effect at the beginning of 2013 unless lawmakers do the unlikely and approve new federal tax guidelines. Bush era capital gains tax cuts expire in January, raising the long term rate on profits made from real estate from 15% to 20%, but that’s only the start.
Another 3.8% will be charged starting in the New Year to individuals making at least $200,000 a year or couples making $250,000 on home sales to pay for the Obama Administration’s new Medicare plan. The combined tax hikes stand to produce a cumulative tax increase from luxury home sales of 8.8% or 23.8% of the sales price to be paid to the IRS.
For some high end homeowners the extra tax could be a nightmare and wipe out equity in their homes that they have depended on for years. Some home sales would result in millions of dollars of extra federal taxes for the government. The extra tax could also derail the housing recovery in high end markets.
Homeowners in the high end market are selling their properties at a higher rate than in years in order to meet the deadline to pay the lower tax. Average sales are up 23% in the U.S. for homes above $1-million, most of the properties affected by the hike.
Individuals who make a profit of $250,000 or more on the sale of a home that is the seller’s primary residence ($500,000 for a married couple) must pay a tax of 15% to Uncle Sam on the additional profit currently. But if the Bush capital gains tax cuts expire like they are expected to by many in Congress, the base tax rate on long term capital gains rise to 20%.
The Obama Administration has urged the extension of the Bush era tax cuts, but disagreements among Republican and Democrats over the details have led to a Congressional stalemate on the issue. If both parties can’t reach an agreement by the end of the year, the tax increases go into effect.
The House of Representatives voted in favor of extending the Bush tax cuts last week, but the Senate has failed to reach an agreement on the issue. “We must stop the largest tax increase in American history on January 1st of next year,” said House member Vicky Hartzler (MO-R). “Failure to extend the current tax rates will result in extreme hardships for families.”