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Realities of Real Estate: Real estate taxes and health care overhaul

Almost two years ago, we wrote a column about the taxes associated with buying and selling a house. Traditionally, a buyer and seller can expect to split what is known as documentary stamps and transfer taxes.

At that time, we also detailed additional real estate taxes that would be the result of our then-freshly minted Affordable Care Act, more commonly known as Obamacare.

In light of the recent Supreme Court decision about health care, we thought it would be a good time to revisit the taxes associated with buying or selling a house. Although the health care debate might be dissociated with real estate, beyond the heart palpitations encountered with declining home values, there are some aspects of the voluminous Affordable Care Act that tap real estate transactions in an effort to pay for this new goliath.

But, before we get into the real estate taxes associated with the health care bill, let’s first review the taxes already in place when you buy or sell a house.

Essentially, there are three different taxes – the state transfer tax, the county transfer tax and documentary stamps (sometimes referred to as recordation taxes).

If you add them up, it comes to 2.2 percent of the sales price of a house in Anne Arundel County. So, on a $500,000 house, a total of $11,000 in taxes will be paid at settlement. Traditionally the taxes are split 50-50 between the buyer and the seller.

State and local taxes

The state and county don’t really do much of anything for these taxes. It’s essentially just a sales tax on home sales. The taxes are calculated as follows:

The Maryland state tax is 0.5 percent of the home’s sales price, or $2,500 on a $500,000 house. One important thing to remember on the state tax is that Maryland provides a break for first-time homebuyers. If you have not previously owned a home in the state, the state transfer tax is reduced from 0.5 percent to 0.25 percent, and the 0.25 percent will be paid entirely by the seller.

So, as a first-time buyer, you will save $1,250 in the purchase of a $500,000 home. It’s not exactly the kind of dough that will have a serious impact on the total cost of buying a house, but anytime you can save on taxes, it’s a good thing.

The county transfer tax varies, depending on the county where the sale takes place. In Anne Arundel County, the transfer tax is 1 percent of the sales price, or $5,000 on a $500,000 house. Next door in Prince George’s County, the transfer tax is 1.4 percent, or $7,000 on that $500,000 house.

As with all of these taxes, they’re normally split evenly between the buyer and the seller. Unlike the state tax, however, there is no break for first-time homebuyers.

The final tax is what’s called documentary stamps. This tax also varies county by county. Rather than using a percentage, this tax is expressed as a number of dollars per every thousand dollars of sales price.

For example, in Anne Arundel County, it’s $7 per thousand, meaning that the tax on a $500,000 house would be $7 x 500 or $3,500. The cost of documentary stamps in Anne Arundel County is pretty much middle of the road, as compared to other counties in Maryland.

If you add the county transfer tax to the cost of documentary stamps, it’s possible to compare the cost of taxes from one county to another.

Using our $500,000 house, Somerset County is the cheapest place to buy a house in Maryland. The combined cost of transfer taxes and documentary stamps in Somerset is only $3,300. Conversely, Baltimore has the highest taxes, where you’ll pay $12,500 on that same $500,000 house. In Anne Arundel County, the tax would be $8,500.

The federal tax

In that the Supreme Court has now decided that Obamacare is essentially a tax, here are the taxes that piece of legislation imposes on real estate.

With the upholding of the Affordable Care Act, there is an additional home sale tax you might be responsible for. There has been a lot of misinformation about a federal 3.8 percent home sales tax being buried in the 3,000-page health care law. The truth is that the law does contain such a tax, but there are some very specific circumstances under which it will be assessed.

First, you don’t need to worry about this tax, unless your income is above the magical $250,000 for married couples filing a joint return, or $200,000 for other taxpayers. Second, this tax also isn’t a consideration if the profit on the sale of your home is more than $500,000 for joint filers and $250,000 for individuals.

Third, the new tax doesn’t take effect until Jan. 1, 2013. You’ll enjoy the benefits of the Affordable Care Act before the election and you’ll get hit with the taxes after the election.

If you’re a couple making more than $250,000, and realize more than $500,000 in profit on the sale of your home, the health care law is going to hit you with an additional 3.8 percent tax on top of what you already owe in capital gains. How that tax is calculated is a bit complicated.

Let’s say your income is $350,000 and you make a $650,000 profit on the sale of your house. The 3.8 percent tax is applied against the difference between your income and the $250,000 threshold or the difference between your home sale profit and the $500,000 exemption you’re given for that, whichever is less.

In our example, a couple making $350,000 is $100,000 over the $250,000 income mark, where the feds have decided you’re rich. And, the $650,000 profit on their home sale is $150,000 over the $500,000 exemption.

So, the 3.8 percent tax is figured using the smaller of those two numbers, which is the $100,000 income difference. This couple would owe an additional $3,800 in taxes.

The issue with this aspect of the Affordable Care Act is that is applies a $250,000 threshold across the entire country. If you’re making $250,000 in the hills of Tennessee, you’re rich; if you’re making $250,000 in mid-town Manhattan, you’re scraping by.

The financial design is oriented primarily toward political advantage, rather than accommodating for how people pay a “fair share” in health care.

So the Supreme Court has punted the debate over health care back to the Congress. As a taxing issue, there will be multiple efforts to identify the income streams necessary to make sure the smallest sniffle will be funded by the new health care law.

The debate over health care will be reinvigorated in Congress where it belongs, but as a significant part of the economy, real estate will almost surely be asked to help fund the largess politicians find necessary to perpetuate their own existence. This might forestall the beginning of an economic and real estate recovery.

Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is [email protected]