Have you been hearing scary rumors about a new tax on all home sales? Some misleading information has been going around, so don’t panic! This article will give you the straight scoop on whether you’ll be paying higher taxes on your next home sale.
Now, the rumor is that “Obamacare” legislation imposes a 3.8% tax on all Real Estate transactions. This is totally UNTRUE. The truth is much less shocking, but also much more complicated.
In order to shore up the Medicare Trust Fund, healthcare legislation is imposing a tax on two separate kinds of income. What you earn is known as your modified adjusted gross income, or MAGI. This amount may be just your salary, which is known as Earned Income, or it may include investment income, which is classed as Unearned Income.
The Medicare tax on Earned Income (like salary, wages and commissions) applies for amounts above $200,000 for individuals and $250,000 for married taxpayers. These earnings are already subject to a Medicare tax and an additional .9% tax will be added in 2013, but only for the amount of income that exceeds this salary cap.
For example: If you are single and earn $210,000 that means a .9% tax on $10,000, which equals $90
97% of taxpayers earn less than the salary cap amount and won’t be affected by this at all.
The Medicare tax affects Real Estate because it’s on the category known as “Unearned Income.” This includes investment income from rental properties and Capital Gains on house sales. The Medicare Tax on this category will be 3.8%.
The amount that you make when you sell your home, beyond what you originally paid for it, is called Capital Gains. Gains of up to $250,000 for single taxpayers or $500,000 for married taxpayers on the sale of their “Primary Residence” are already excluded from taxes. (This exclusion ONLY applies to primary residences. Sales on Investment Properties are subject to full Capital Gains taxes.) Anything under that remains tax free as usual. Additionally, the tax still only applies for total income over $250,000 which means that you may have to pay Capital Gains tax, but still be exempt from the new Medicare Tax.
For example: If a married couple originally bought a home for $100,000 and then sold it for $600,000, there would be no tax on that Capital Gain.
If that same home sold for an additional $50,000 and the couple had earned $150,000 in income that year, their MAGI would still be under the $250,000 threshold for total income at $200,000. Capital Gains tax would apply to that $50,000, but there would be no 3.8% Medicare tax.
If that couple had earned $250,000 in income their MAGI after a $550,000 Capital Gain would be over the threshold, and that $50,000 above $500,000 would be subject to a Medicare Tax of 3.8% (Which is a $1,900 tax)
If you are a married couple with more than the $250,000 limit on earned income AND you sell a house with more than $500,000 in profit, you will only be taxed on the smaller amount based on 3.8% of the earned income over $250,000 or 3.8% of the house sale profits over $500,000. For example: If a married couple earned $260,000 and sold a house with a profit of $50,000 above the $500,000 Capital Gains limit, they would be taxed on the Capital Gains, which is lower at $1,800.
Disclaimer: Other facts and circumstances may need to be considered. This new Medicare Tax affects many other forms of income, so please consult your tax advisor for full details. Call me if you’d like a recommendation for an accountant.