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To Sell Or Not To Sell?

by John P. Gordon, Esq.

You may have recently heard about or received a chain e-mail about a new 3.8% tax on every real estate sale. As is often the case, it may only tell part of the story. The recent health care overhaul brought with it a Medicare surtax on investment income that will apply after 2012. Investment income includes not only income from what is commonly considered an investment such as stocks and bonds, but also income from passively held real estate and profits from its sale. This can include your principal residence, second or vacation homes, investment and commercial real estate. If you’ve been thinking about selling, now may be the time to plan, considering the current state of the real estate market and the extended period of time it may take to find a buyer. However, that does not mean that everybody whose real property is worth more than they paid for it will be hit with the tax.

To begin with, the first $250,000 of gain on the sale of a primary residence is free from capital gains tax ($500,000 for married couples filing jointly) if the seller lived in and owned the home for at least 2 out of the 5 years prior to sale (many people mistakenly believe the old rules about reinvesting the proceeds in a new house still apply). Capital gains covered by this exclusion are not subject to the additional 3.8% surtax. Vacation homes, investment properties and commercial properties do not receive the benefit of this exclusion, so the tax burden will hit sellers of these types of properties harder.

The tax only applies to taxpayers with adjusted gross income over $200,000 ($250,000 for married filing jointly), and only to the extent their income exceeds these threshold amounts. However, it is possible that the gain from the sale of the real estate can put the taxpayer who would not otherwise be subject to this tax over the threshold, creating a so-called “rich for a day� problem.

Other investment income will also be subject to this tax, including net rental income from such properties, unless the property qualifies as actively managed pursuant to the Internal Revenue Code.

If you need to review the implications of this new tax on you or your business, or any other matter concerning the ownership, sale or purchase of real estate, please feel free to contact our real estate department.

John Gordon, Esq. is an Associate in the Real Estate and Business Law Practice at Vishnick McGovern Milizio. If you have any questions about this article or would like a recommendation for a real estate professional, John can be reached at 516-437- 4385, ext 143 or via email at Jgordon@vmmlegal.com.