A client forwarded an email to me yesterday claiming that under the new health care bill all real estate transactions will be subject to a 3.8% sales tax in 2013. My client wisely suspected only partial truth in the email and asked for more information. This misunderstood tax is not likely to affect most people, but will affect a limited group of high-income people.
Here is some more information about this so-called Medicare tax which was a last-minute addition to health care legislation enacted in 2010 to help shore up Medicare.
- It is not a transfer tax on real estate, it is a tax on investment income from various sources, including capital gains, interest income, dividend income and net rents. This means that if you have no income from these sources you will never pay this tax, even if you have millions of dollars of other types of income.
- If you sell your home you can still exclude up to $500,000 in profit if you are married and file jointly... and $250,000 if you are single or are married and file separately. This hasn't changed, you just have to own and live in the property as your primary residence for two years out of the five-year period that ends with the date you sell the home.
- This tax on investment income applies only to combined adjusted-gross income (AGI) above $250,000 for joint filers, $125,000 for married couples filing separately, and AGI of more than $200,000 for single filers. In addition, the tax is imposed on the smaller of (1) total investment income or (2) the amount by which AGI exceeds the threshold amounts of $250,000 or $200,000.
The tax goes into effect in 2013, payable when you file your income taxes in 2014. Below is an example of how it might impact the sale of a primary residence...
- A couple with an Adjusted Gross Income of $325,000 sells their home at a profit of $525,000 (profit, not net sale proceeds)
- $500,000 of that gain is excluded as sale of their primary residence
- The $25,000 capital gain that isn't exluded raises their AGI to $350,000
- The couple's revised AGI exceeds the $250,000 threshold for joint filers by $100,000, but that is more than the $25,000 amount of their capital gain
- The 3.8% tax is applied only to $25,000, the smaller of the two amounts above
- They owe a surtax of $950 ($25,000 x 3.8%)
