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The 3.8% Tax and Health Care Reform

A 3.8 percent tax on investment income was created as part of the Affordable Care Act. NAR’s 3.8% Tax FAQ addresses common questions, and the Top 10 Things You Need to Know About the 3.8% Tax provides a quick one-page overview of the tax’s provisions.

While misinformation has been spread about the 3.8 percent tax, NAR has provided its members with a worksheet that clearly explains how the tax works (PDF) and how it affects REALTORS® and their clients. The worksheet contains several examples to show members how the tax is applied.

In the video The 3.8% Tax Is Not a Real Estate Transfer Tax, NAR Director of Tax Policy Linda Goold explains the 3.8% tax and provides context. A recent Speaking of Real Estate blog post, 3.8% Tax: What’s True, What’s Not, provides more clarification.

Additional background information is below.

Background and Purpose

On March 30, 2010, the Health Care and Education Reconciliation Act of 2010 was signed into law. One of the provisions of this second component of the health care reform law that has received much attention is the creation of a 3.8 percent tax on investment income—defined as interest, dividends, capital gains and net rents. This tax was a last-minute addition to the Reconciliation Act of 2010.

Revenues generated by the 3.8 percent tax are statutorily allocated to the Medicare Trust Fund. This component of the health care reform law will take effect on Jan. 1, 2013. Some of the key points about this tax are:

  • The tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI.
  • The new tax does NOT eliminate the benefits of the $250,000/$500,000 exclusion on the sale of a principal residence. Thus, ONLY that portion of a gain above those thresholds is included in AGI and could be subject to the tax.

Visit our issue summary for the current legislative/regulatory status on the Affordable Care Act.

In addition, the IRS has also created its own set of FAQs explaining the 3.8% net investment income tax.