The Patient Protection and Affordable Care Act (PPACA), commonly known as “Obamacare,” was signed into law last year amidst a good deal of controversy. The Left sees it as the turning point in decades of health care prices skyrocketing, while the Right sees Big Brother taking over all of medicine. What’s not quite as obvious is that “Obamacare” touches real estate. Namely, the bill introduces a new 3.8% tax on “unearned income,” which in the real estate industry means “capital gains.”

The new Obamacare tax will add 3.8% to capital gains over $500,000 for married couples, and $250,000 for singles. The good news for many is that this new tax will only apply to couples making over $250,000 a year, and individuals making over $200,000 in adjusted gross income.

If the new tax increase were to happen 3-5 years ago, there would be many more people to which it would apply. As it stands, there are few housing markets remaining in which sellers have to worry about much more than $500,000 in capital gains. As an example, I ran some quick numbers for my service market, the affluent southern California city of Manhattan Beach.

Manhattan Beach has a median household income of $107,750, compared to the rest of Los Angeles County, which is around $48,000. At least half of the residents here don’t have to worry about the new tax, but there are many families that fall into the income brackets targeted by Obamacare.

The median home price in Manhattan Beach is currently $1,148,600, but many homes sell for significantly more than that. However, the new tax only applies to capital gains, not to sales price. With the median sale price sitting at only 65 per cent of where it was at the peak of the Manhattan Beach bull market in November of 2008, it’s not likely that there are too many residents with more than $500,000 (or $250,000) in capital gains.

Let’s run through an example to demonstrate how the new tax would work. 222 17th Street is only 550 feet from the beach, and less than half a mile from the town’s pier. The location is incredible, and the home spectacular. The property closed escrow earlier this month for $4,653,000, up from its previous sales price of $3,705,000 in March, 2007.

Obamacare’s toll in this scenario is between $17,000 and $27,000, depending on whether or not the seller is a family man, or a bachelor. To calculate the new tax, we subtract the old sell price from the new to come up with the capital gain, remove the first $500,000 or $250,000, and apply 3.8 percent to the remaining balance. What this really equates to is 1.8% or 2.8% of the equity gain. So despite a good amount of public angst over the new tax, the net effect will not be devastating. Few asset purchase decisions are swayed by a worst case tax burden of 3 percent.

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