Dennis' Mortgage Blog

Question of the week:  Is it true that starting in 2013 when someone sells their home they will have to pay 3.8% in taxes on the sale?

Answer:  There was an email that circulated through the local real estate community this week regarding a sales tax on real estate as a result of the Patient Protection and Affordable Care Act (PPACA), more commonly referred to as “ObamaCare;” it was forwarded to me by three real estate agents and two clients who received it from agents. 

The gist of the email is that if you sell your home for $400,000 you will have to pay a “sales tax” of 3.8%, or $15,200; which is incorrect. 

This is not to say that there is no new tax on real estate sales that will go into effect in 2013 as a result of PPACA, there is one but it will not impact the sale of every home.

Given the bulk of the PPACA at over 2,000 pages and the lack of complete scrutiny of the Act and its provisions prior to passage and Presidential signature there are many provisions that have become public that impact many areas of the economy and daily life beyond health care, most of it to pay for the costs of the programs to be implemented, among them is a surtax on real estate sales.  Here is how it will work:

The PPACA has a capital gains tax provision on couples making over $250,000 or individuals making over $200,000 that if there is a capital gain on the sale of their home that exceeds $500,000 for couple or $250,000 for individuals then that amount of the gain over the threshold ($500,000/$250,000) is subject to the Medicare tax above and beyond the regular capital gains tax that would be applicable.  Note this applies only if the income threshold and the capital gains threshold are met, not sales price but capital gains. 

So if couple makes $260,000 and sells their home for $1,000,000 with $600,000 capital gains—say a home in Los Cerritos section of Long Beach they bought in 1995 and sold today—then they would pay 3.8% on $100,000, the amount of the gain over $500,000 in addition to their normal capital gains taxes.  In 2013 capital gains is scheduled to go to 20%, or $20,000 for this transaction, plus $3,800 for the PPACA tax.  The couple pays an additional $3,800 on this sale.

None of these numbers are indexed for inflation so in 3 years, 5 years, 10 years the same income and gains thresholds apply; in other words if not repealed a couple in 2025 making $255,000 would be subject to the same tax even if adjusted for inflation $255,000 in 2025 is equivalent to $175,000 today.

The text of the email that is being circulated is a bit misleading but not entirely inaccurate, the tax does not apply to every home sale, but it does apply to many especially in areas of California that have home prices that could have over $500,000 in appreciation since they were purchased; which includes many areas of Southern California where homes were purchased before 2000.

What I have not been able to ascertain is that if the gains are deferred and rolled into a new home if the Medicare tax still applies, or if the home being sold does not have a capital gain over the $500/250k threshold but they are subject to capital gain due to a lower cost basis on a prior home(s) sold where the gain was rolled into the home being sold.  Some smart CPA or tax attorney reading this who knows the Act please let me know.

In 2012 a very big issue in the election campaigns, not just for President but also for the 33 Senate seats and every House seat, will be provisions such as this in the PPACA and whether the entire Act should be repealed or left to go into effect in 2013.  Depending on the Supreme Court’s decision on the matter which will be heard in June 2013 the repeal debate may be mute, or it may be a central issue defining the election.  Exercise your right to vote, it matters.

Have a question?  Ask me!

An odd week has seen stocks climb, most notably with a big jump out of the gate at opening on Monday, and rates climb as well.  With markets still reacting to every little bit of news out of Europe and gauging whether Eurobanks will collapse or be saved, and therefore tremors hurting U.S. banks or not, economic data for the American economy was head scratching.

In September retails sales were up 1.1% over sales in August, it was the largest gain in seven months. This should be good news and on its own cause rates to perk up some.  However, on the back of the September sales number came the University of Michigan consumer confidence report for October, and it was down two points from September.  Lower consumer confidence should result in lower retail sales as consumers spend less and hoard more to be prepared for a economic future they are less confident about.

One explanation is the hoarding was part of the September sales binge with families taking advantage of back to school sales to load up on shoes, clothes and other durables.  If this is the case then retail sales in coming months should decline reflecting consumer sentiment.  On the other hand (the most favorite of all sayings by economists), consumer’s may be showing less confidence but feel they are perhaps at the bottom and will make the best of it.  Either way the conflicting data creates instability and that leads to volatility which means don’t take risks.

On the interest rate front it appears we bottomed out in the days following the Fed’s Twist announcement.  Ten year U.S. Treasury notes, a harbinger for mortgage rates, are up over one-half of one percent (0.50%) in the past two weeks and Mortgage Backed Securities (MBS) reflect the increase.  The Treasury is still pumping out notes of all maturities to finance the federal deficit and with the Fed out of the market with new money buyers are lacking.  Low demand means lower prices, lower prices mean higher rates.

For Mortgage Backed Securities some good news that could prevent, or hold back, a large decline in prices (increase in rates) is that PIMCO, a major, major player in bond markets, has announced it will undergo a very large MBS purchasing program.  That combined with the Fed recycling funds from its MBS portfolio back into purchasing more MBS with refinance pay-offs give some optimism for rates to remain low, just not as low as they were in the previous few weeks.

Rates for Friday October 14, 2011: FHA is quite the value right now, especially high balance, even with the higher mortgage insurance premiums due to the available credits for the low rates.  We have several clients finding it is more economical for them to refinance their high loan to value mortgages into FHA financing as opposed to conventional due to the spread in interest rates.  Conventional mortgages climb for high balance and are flat for conforming balances this week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.875%             Flat

30 year high-balance conforming           4.25%               Up 0.125%

30 year FHA*                                                   3.75%               Reduced credits

30 year FHA high-balance*                   3.75%               Reduced credits

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

* Current rates include credit towards closing costs, call for quote on rate and credit.

Our hearts have been broken with the tragedy in Seal Beach earlier this week when a man entered his wife’s place of work, a neighborhood salon, and killed her and seven others.  Tragedy is always local and not less so in this instance as the incident occurred across the street from our church and a few doors from a restaurant I frequently have lunch in with our pastor, usually near the time of the attack.  Last night there was vigil in front of the salon attended by hundreds, perhaps one thousand, mourners; prior to the vigil our church held a prayer service.  At the service a few who spoke said, “This is not supposed to happen in Seal Beach.”  No, it’s not, but it is not supposed to happen anywhere.  I’m sure the people of Columbine, San Ysidro, Killeen and Nickel Mines said the same thing when their quiet communities where shattered by the acts of murder.

What we learn from these tragic events is that live is not only precious but somewhat random as none of knows neither when nor how we will exit this wonderful life.  Hopefully we learn to live with grace, respect, love, awe and wonder and in so doing make it memorable and enriching for ourselves and those with whom we are blessed to interact.

Prayers and blessings to the families, friends and community impacted by the senseless act of one man on Wednesday afternoon in Seal Beach, and to those impacted throughout the world by the senseless acts of others.

With gratitude to everyone who enriches my life,

Dennis