Rumors are circulating that all real estate transactions, including sales of personal residences, will be subject to a new 3.8 percent federal sales tax beginning in 2013.
These rumors are false.
The rumors resurfaced after the Supreme Court upheld the constitutionality of most of the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 – collectively referred to as “Obamacare.”
Here are the facts:
Beginning Jan. 1, 2013, a new 3.8 percent Medicare tax on unearned income will take effect. As a result, a small number of people will pay an extra tax on gain from the sale of their principal residence.
The new tax applies to single individuals with modified adjusted gross income (MAGI) in excess of $200,000 ($250,000 for married couples). The tax is equal to 3.8 percent of the lesser of net investment income or the amount by which MAGI exceeds the threshold amount.
When you sell your home, you may owe the tax if all of the following circumstances apply:
- Your modified adjusted gross income exceeds the applicable threshold.
- You sell your home at a gain.
- Your gain exceeds the excluded amount ($250,000 for single taxpayers and $500,000 for joint returns).
Only the portion of the gain that is not excluded will be subject to the 3.8 percent tax.
For example, you and your spouse file a joint return in 2013. Before considering the sale of your home, you have MAGI of $325,000 and no other investment income.
Many years ago, you had purchased your home for $350,000. In 2013, you sell the home for $900,000, realizing a gain of $550,000. After excluding $500,000 as “gain from the sale of a personal residence,” you are left with $50,000, which is considered investment income.
Since your MAGI ($325,000 + $50,000) is $125,000 over the tax’s threshold amount for married couples filing jointly, the lesser amount of $50,000 is subject to tax. At 3.8 percent, you owe $1,900 of Medicare tax, plus a capital gains tax on your $50,000 gain (at whatever rate is in effect for 2013).