By Kenneth H. Bridges, CPA, PFS August 2011
One of our clients recently forwarded us an e-mail (apparently originated by an attorney) warning that under new tax rules you will incur a tax of 3.8% on the sales price of your home if you sell it. The e-mail included an example of your incurring a tax of $11,400 on the sale of your home for $300,000. Several other clients have asked about this, so apparently this e-mail (or similar ones) has been circulated quite a bit.
So, would you really incur a tax of $11,400 on the sale of your home for $300,000? Well, theoretically that is possible. But, it is highly unlikely.
The e-mail is apparently referring to the 3.8% unearned income Medicare tax which was included as part of the very controversial health care legislation which was enacted in March 2010. This 3.8% tax (which is scheduled to take effect in 2013, but could potentially be repealed before then) applies to “net investment income”. “Net investment income” for these purposes includes capital gains, but only to the extent the gain is included in taxable income. In computing the gain from the sale of a home, you get to reduce the proceeds by your basis (i.e. generally cost). Also, current tax law permits a married couple to exclude from taxable income up to $500,000 of gain from the sale of their primary residence. Accordingly, a married couple would generally have to have at least an $800,000 gain on the sale of their primary residence in order to incur $11,400 of tax under this new provision. Also, this tax does not apply at all unless you have at least $250,000 of adjusted gross income for the year ($200,000 in the case of a single person).
So, to answer the earlier question, you could theoretically incur a tax of $11,400 on the sale of a home for $300,000, but only if your cost basis in the home were zero and the home did not qualify for the residence gain exclusion. The reality is that the new 3.8% Medicare tax on net investment income is not likely to have much of an impact on the sale of primary residences. However, we do need to keep it in mind in our tax planning; especially from the standpoint of potentially accelerating capital gains into 2012 in order to get out in front of this and other tax increases which may take effect for 2013.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.