The U.S. luxury home market experienced a flurry of activity in the final months of 2012 as a result of expected tax increases that were a part of the budget deal averting the ‘fiscal cliff.’

On January 1, 2013 average high-earners – singles with incomes of $200,000 or more and couples with incomes of $250,000 or more – will be paying more in capital gains than in 2012, so it was in their best interest to unload properties before the end of the year. The capital gains tax increased from 15% to 20%, and a 3.8% Medicare surtax on investment income went into effect. This means that “a high-earner would pay $88,000 less in taxes if they made a $1 million profit on their home in 2012 rather than in 2013,” as CNN stated.

Meredyth Smith, of Sotheby’s International Real Estate, noted that: “Ever since last summer when people realized that the fiscal cliff was approaching, there was an incentive to get deals done.” And, as expected, homes valued at $1 million or more increased 51 percent in November compared to a year earlier.

Those flipping homes owned by high earners impacted by the budget deal should be aware that until the higher tax rates are fully solidified, homeowners will be wary of selling. Future negotiations and elections in Washington could result in a reversal to previous tax rates but, even so, historically low interest rates, a recovering housing and job market, and increases in foreign investment in U.S. real estate could prove the drop-off to be short-lived.

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