Economists are openly worried that if the Bush Tax Cuts Expire at the end of 2012, the US will face another recession and it could be devastating to the already sluggish housing recovery. Lawmakers on both sides of the aisle are pushing to extend the lowered rates for at least some Americans, fearing our fragile economy cannot handle what would be “the biggest tax increase since World War II”.
If the Bush cuts expire, top tax rates will increase from 35 percent to 39.6 percent. The capital gains rate will jump from 15 percent to 20 percent and dividends would revert to a higher rate. Unless Congress takes action and gets support from the president, rates will go up for every taxpayer.
Altogether, the tax increase would cost taxpayers about $95 billion in 2013 alone. With the typical American family scheduled to lose well over $1,000 in additional income from the expiration, there are heated political debates about how to preserve the health of our middle class. California stands out as one of the Top 5 states to be impacted in 2013 by the tax cut expirations, with the savings being lost reaching an average of $4500.
How the Tax Cuts Impact the Housing Market
Currently, an individual who makes a profit of $250,000 or more from the sale of his or her primary residence ($500,000 or more for a married couple) must pay a 15 percent tax on that profit (minus deductions including renovation costs and closing costs). But if the Bush-era capital-gains tax cuts expire, the tax rate on such proceeds will jump to 20 percent.
Plus, starting in 2013, individuals who make at least $200,000 in income (or married couples making at least $250,000) will have to pay an additional 3.8 percent health-care tax on capital gains. The legislation is set to go into effect in 2013. In all, the tax hikes stand to bring the cumulative tax rate on gains from luxury-home sales up by 8.8 percent to 23.8 percent.
While the tax cuts debates are unresolved, and will most likely remain at a stalemate until after the upcoming Presidential election, it is already having an impact on the housing market. Real Estate investors and homeowners in the high-end market are gearing up for the potentially game-changing legislation on capital gains and working with savvy real estate agents to close transactions before the year ends.
“Knowing that capital gains could go up more than 50% is motivating sellers to sell their homes quickly,” said Russ Schreier, VP of Sales for Samuel Scott Financial Group. “We’re seeing signs that luxury homeowners are willing to accept lower offers from buyers and there is more interest in 1031 exchanges as people look to protect themselves from future tax burdens.”