Wealthy homeowners with properties for sale need to close the deal in the next five months because, if the Bush tax cuts expire and capital gains tax rates go up on January 1, sellers in the high-end real-estate market could owe millions more in taxes on their sales.
As more of the wealthy sell out of fear of a tax increase, they could drive up inventory and lower prices in the top of the real estate market, which has been one of the few bright spots in the economy. Any softening at the high end, or a spike in inventory, could ripple through the housing market and add new pressure to prices.
The math of the ‘Mansion Cliff’ is compelling. If the Bush tax cuts are allowed to expire, the current capital gains tax of 15% will rise to 20%. Families who sell a second home that they’ve owned for more than a year pay capital gains taxes on the difference between the sale price and their original purchase price (minus certain fees, improvements and other deductions).
A $38 million home purchased for $8 million with $2 million in improvements could show a gain of about $28 million. The current federal tax bill on that gain would be around $4 million. If taxes go up next year, the tax would be $5.5 million—a difference of $1.5 million.
The new federal health-care tax of 3.8% also kicks in next year for couples that make $250,000 or more. But for the $28 million gain described above, the tax could add another $1 million, bringing the total tax difference to $2.5 million.
In addition to the federal tax, there will also be state and local taxes applied to the gains. Some of those tax rates are also expected to go up in some states next year.
To read Robert Frank article: Wealthy Homeowners Brace for ‘Mansion Cliff’
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