How does the Supreme Court ruling affect your house?

Striped awning luxuryIt was about healthcare, right?  Regardless of your feelings about the legislation and the subsequent challenge by the states, the intent of the bill was to alter how Americans have access to healthcare.

Ah, but there is the funding.  First the individual mandate, which was ruled unconstitutional, but allowed to exist as a tax.  A tax is something which the government is allowed to impose.

More interesting to property owners is the capital gains tax imbedded in the law.  It now becomes less about your health and more about what you do for income.

Joe and Mary, a retired couple, purchased their home in 1987 for $84,000.  They own it outright, but find it more than a little cumbersome to deal with yardwork and maintenance.  They want to downgrade, rent a smaller place and spend their retirement funds visiting beaches all over the world.  Good plan.

Their real estate broker does a market analysis and suggests a listing price of $485,000.  That’s enough back to get a little sand under their toes, don’t you think?

If they sell in 2012, they will pay normal closing costs and [on average] 6% to the real estate agents involved in the transaction.  For sake of argument, we’ll say they receive $454,000 at the close of escrow.

If they wait until 2013, in addition to the nominal closing costs and real estate commissions, they will pay 3.8% in capital gains surcharge to fund the Affordable Health Care Law.

At close of escrow, their check will be $18,430 less.  Ouch, OK.  Sell in 2012.  Got it.  $18K is a good Mediterranean cruise with lots of souvenirs.  What else?

Investors, sit up and take note.  The 3.8% applies to not only capital gains, but also to passive income.  Yup, that stuff the mentors want to help you achieve.  Rents are taxable above and beyond income tax.  If you sell your rental properties, you will be hit with the double whammy of taxed rents collected, as well as the capital gains.

If you’re involved in selling anything in a multi-level system, the percentage you receive from your “downline” or “recruits” or whatever the system calls them, is passive income.  And it just got smaller.  I sell Mary Kay and one of the things I enjoy each month is to see how much the highest earners receive.  The tax on Carol A’s $67,000 monthly commission means her CPA will now have to submit $2,546 that month to pay for the healthcare law.  Who saw that coming?  Her hard work of 30+ years just got penalized.  OK, I realize not many people will be weeping in their beer over the dip in her income, but it affects all sorts of strata of passive income earners.

Bottom line, unless it’s repealed, if you’re selling property, you’ll end up with more in your pockets if you do it sooner.  If you’re investing, don’t stop.  As with all regressive taxes, it just means you’re going to have to work a little harder, but do not let anyone else steal your dream!

Disclaimer:  I have not the skill nor legal training to intepret the health care law.  I am relying on analyses by the Wall Street Journal, the Economic Policy Journal and others, whose job it is to fully understand these things.

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