I’ve received many questions from clients asking if there is a new 3.8% Tax on Home Sales, so I thought I better shed some light on this topic. The topic itself comes from the passing of the Patient Protection Affordable Care Act (PPACA) health care legislation earlier this year. Before going any further, I just want to make sure that all understand that I am not an accountant or tax professional so when it comes to IRS Regulations, you should check with your accountant or tax professional for the most up to date information. This is also not a political blog so I will not be taking any sides here, just relaying some of the facts that I have come to understand on the 3.8% Tax on Home Sales.
According to the legislation, beginning January 1, 2013, there will be a 3.8% Medicare Tax on a portion of the net investment income of those deemed “High Income Filers”. This tax is NOT specifically on Real Estate transactions! This tax is just on the “Net Investment Income” of certain people. So let’s pull this apart into who will be affected, and then How they will be affected.
Who Does this Tax Affect?
A “High Income Filer” is a single person filing a tax return with an Adjusted Gross Income (AGI) over $200,000, or a married couple filing jointly with an AGI over $250,000. Not everyone in this category will be affected either, but if you are filing a tax return with an Adjusted Gross Income less than the $200k/$250k level, this does not concern you.
How Does this Tax Affect this Group?
In respect to the sale of a Primary Residence (the home you own and live in full time) if the gain on the Sale of the property is less than $250,000 (individual) or $500,000 (couple filing jointly), NO tax will be paid on the gain. This rule has been in affect for some time and is not changed in this legislation. So if you are a “High Income Filer” and sell your primary residence for less than a $250k(single)/$500k(married) profit, then your real estate sale will not be affected by this bill. The New Medicare Tax will only apply to any gain realized OVER $250k/$500k.
So you can see that this is not a direct tax on Real Estate Specifically, and the favorable tax rules on primary residence sales with gains less than $250k/$500k are still in affect. For most of the clients I have shared this with, it has greatly eased their minds since unfortunately, I haven’t seen an overwhelming number of home sellers with a gain of more than a half-million dollars in our current market.
For a more complete explanation of this section of the legislation, and how it will affect second homes and investment properties, see this report put out by the National Association of Realtors.
I hope that clears up some of the confusion around the 3.8% tax on Home Sales question. If you have a specific question regarding the sale of your own home, don’t hesitate to contact me.
Governor Perdue signed into law House Bill 261 on May 11th which provides an income tax credit for the purchase of a single-family residence during the six months between June 1 and November 30, 2009. The credit amount is the lesser of $1,800 or 1.2 percent of the purchase price. The tax credit is applied over three years, with one-third of the credit available each year (so for you people that didn’t major in math, if you got the whole $1800, that would be $600 each year for the next three years 
. If the amount of the credit exceeds the taxpayer’s tax liability, the unused credit may carry forward to the next tax year.
