Facts about a new tax on real estate sales, plus CPA, Realtor explanations

Info For Pros, Info for Sellers · Read in 8 minutes 

Chicken Little Sells Her House

Reposted with Bill Zumwalt’s permission, emphasis added.

William T Zumwalt CPA, PLLC
5416 South Yale Ave, Suite 120
Tulsa, OK 74135
918-583-1040
Website | Facebook

Hi!-

Life would be a lot easier for all of us if tax laws didn’t change all the time. Every year, Washington writes new laws. The IRS writes new regulations interpreting those laws. The Tax Court issues new decisions interpreting those regulations. And the IRS issues enough revenue rulings, revenue procedures, private letter rulings, and similar proclamations to keep an army of accountants and attorneys gainfully employed.

Sometimes, in the midst of all that motion, facts get twisted and misinterpreted. Sometimes a rumor gets launched that takes on a life of its own. Right now, there’s an email going around that has most of us tax professionals shaking our heads. It warns that, starting in 2013, the healthcare reform act imposes a 3.8% sales tax on home sales. If you sell your $400,000 home, you’ll owe a $15,200 tax!

If you see it in an email, it must be true, right? The truth, as is often the case with taxes, is a little more complicated than that – and a lot less scary. First, let’s take a look at how taxes are figured on home sales today:

  • First, calculate “adjusted sale price.” This is the sale price of the house, minus expenses of actually selling it (last-minute fixups, commissions, etc.).
  • Next, subtract “adjusted basis.” This is the price you paid for the house, plus closing costs, plus any improvements you make that add value, prolong its life, or give it a new or different use. “Adjusted sale price” minus “adjusted basis” equals “gross profit.”
  • If you’ve owned your home for more than two of the last five years and used it as your primary residence for more than two of the past five years, you can subtract a “Section 121 exclusion” of up to $250,000 if you file individually or $500,000 if you and your spouse file jointly. If you don’t meet the two-year requirement, you can still take a pro-rated exclusion reflecting how long you did meet those requirements.
  • “Gross profit” minus “allowable exclusion” equals taxable gain. If you hold your house longer than a year, it’s taxed as long-term capital gain and capped at just 15%.

The bottom line here is that few home sales are taxable – especially in today’s down market – because of that Section 121 exclusion. So, where does the new healthcare law come in? Well, it does impose a new “unearned income Medicare contribution,” beginning in 2013, of 3.8% on capital gains, for individuals earning over $200,000 and families earning over $250,000. (Don’t you love how the folks in Washington spin that 3.8% “unearned income Medicare contribution”? Wouldn’t it just be easier to call it a “tax”?)

That means any gain on the sale of your home that isn’t already sheltered by the $250,000 or $500,000 exclusion might be subject to the new tax if your adjusted gross income is over the $200,000 or $250,000 threshold. That’s a pretty far cry from saying there’s a new 3.8% sales tax on home sales!

But somewhere along the line, Chicken Little saw the new 3.8% tax, missed the rest of the process, and saw the sky starting to fall. Being a thoroughly
modern chicken, she hopped on her computer to fire off an email telling all of us that the sky was falling – and that email spread faster than the latest news about Snooki or the Kardashians. So now here we are, setting the record straight.

The next time you get an email with a rumor that sounds too awful to be true, don’t just run around like Chicken Little. Send it to us. We can tell you if it’s something you really need to worry about – and if so, we’ll help you craft a plan to avoid or minimize the threat!

Commentary

Bill Zumwalt writes a weekly email, just like the one above. He’s great at including both facts and humor. You can contact him to inquire about his CPA/Accountant services and share your interest in receiving his email updates. Bill specializes in real estate (including Realtor) taxes, which is how I got connected to him. He’s one of the friendliest and helpful CPAs and he never makes you feel dumb.

If you need a CPA, call Bill. If you need a Realtor, call me. We’re independent, but we’re both committed to sharing a variety of helpful knowledge to supplement our quality services.

Who needs a CPA?

There’s sort of a saying that no money has ever been wasted on a CPA. Like any industry, some people don’t live up to the general credential and some excel beyond it. Maybe I made it up or maybe I heard it somewhere, but I believe it in general.

I have personally prepared taxes, reviewed thousands of federal tax returns, and worked at H&R Block. I’ve seen way too many easy, quick deductions and credits not taken because of someone trying to save a buck preparing taxes by hand, too cheap to pay $10-$100 for tax software or a CPA.

For simple returns or people who feel comfortable preparing their own taxes, tax software like Tax Slayer is probably sufficient. Just make sure to take the time to go through all the questions. Personally, I wouldn’t recommend the typical H&R Block preparer as an alternative to a CPA. H&R Block’s typical preparers are more like having someone go through tax software for you. Plus, they have some benefits like early refunds, audit guarantees, and the face-to-face interaction that some people prefer to have. But I’ll tell you that most don’t have the knowledge or experience needed to be an Enrolled Agent (EA) or CPA. For clarification’s sake, I want to make sure you understand that H&R Block does employ some EAs and CPAs.

CPAs have more than just tax expertise. They also have general accounting and financial skills. So if you have advanced financial questions in addition to tax questions or you have a business or other accounting needs, a CPA is even more appropriate than “just a tax professional”, like an EA. The AICPA offers a good Q&A (written for potential CPA candidates):

What is a CPA and what do they do?
CPAs are many things. They are chief financial officers for Fortune 500 companies and advisors to small neighborhood businesses. They work for public accounting firms, both small and large. They are well-respected strategic business advisors and decision-makers. They act as consultants on many issues, including taxes and accounting.

A CPA, or Certified Public Accountant, is a trusted financial advisor who helps individuals, businesses, and other organizations plan and reach their financial goals. Whatever those goals-saving for a new home, opening a new office, or planning a multi-billion dollar merger-CPAs can help.

Getting your CPA certification opens the kinds of doors that can fast-track you into influential jobs in every industry. Whom do you think the FBI recruits to investigate criminal fraud? What profession is often a stepping-stone to holding positions like Chief Financial Officer (CFO) and Chief Executive Officer (CEO)? Who helps rock stars manage their money, and avoid going broke? View the career opportunities section.

Who needs a Realtor?

In general, I’ll say it’s always advisable to use a Realtor for a real estate purchase or sale. They are sizable transactions with reasonable fees. Personally, I’m not your average Realtor so you get great value by hiring me.

When buying a house (personal residence, investment, or other purpose), using a Realtor almost never costs you a dime because the seller is typically responsible for paying the broker’s fee. So free help is a great investment, benefitting you with both expertise and time savings.

When selling a house without a Realtor, you’re responsible for marketing costs, marketing time, showing time, contract negotiations, market analysis, pricing strategies, etc. The results of not using a Realtor might include:

  • Less marketing exposure (fewer potential buyers)
  • Lower sales price (non-professional marketing didn’t showcase the house’s best selling points)
  • Time off work or inconvenienced rescheduling upon short notice (seller must open house instead of using secure electronic keybox, lost wages or greater stress from having to be at the house for showings)
  • Less showing activity from not pricing correctly (no professional Comparative Market Analysis – CMA)
  • More money left on the table (not knowing negotiation strategies or what’s legally allowed to be negotiated)
  • Improper handling of the deal (title, inspections, knowing what stays and goes upon moving out, heightened legal exposure, etc.)

In conclusion, a good Realtor, often will make selling easier and may result in a quicker and/or higher sales price (depending on client’s goals) because of greater marketing exposure and better property presentation, in addition to more creative and professional sales and negotiation strategies.

Only REALTORS® commit to the NAR Code of Ethics (duties to clients and others).

Contact Info

This was a long (but informative) post. Here’s Bill Zumwalt’s contact info:

William T Zumwalt CPA, PLLC
5416 South Yale Ave, Suite 120
Tulsa, OK 74135
918-583-1040
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