New Tax on Windfall Home-Sale Profits
A surtax created by the health-reform law will apply only to high-income individuals who sell their homes after 2012 for a large profit.
I’ve heard that everyone who sells their house will now have to pay a 3.8% tax on the proceeds from the sale because of the new health-care law. Is this true?
No, although it’s possible that an extra tax will fall on a limited amount of home-sale profit realized by some high-income individuals. Here’s the deal:
Starting in 2013, the health-care-reform law adds a 3.8% Medicare surtax to unearned income -- including interest, dividends, capital gains (potentially including profits from the sale of a home), rents and royalties. This tax applies only to people with modified adjusted gross incomes of more than $200,000 if they’re single, or $250,000 if married filing jointly. The surtax applies to investment income or the amount of modified adjusted gross income above $250,000, whichever is less.
Another rule will further protect home-sale profits from the tax. When you sell your home, up to $250,000 of the profit is tax-free if you’re single and have owned and lived in the home for at least two of the five years leading up to the sale. The tax-free amount is a cool half-million dollars if you’re married and file a joint return. Any profit that dodges an income-tax bill thanks to this rule avoids the new 3.8% tax, too. So a married couple who bought a home more than two years ago for $300,000 can sell it for up to $800,000 without having to pay taxes on the sale -- no matter how high their income is. (The exclusion does not apply to vacation homes.)
If they were to sell the home for $900,000 in 2013, however, the $100,000 profit above the tax-free amount would be hit by the 15% capital-gains tax and might be subject to the Medicare surtax, too. It would kick in if the couple’s income (including that $100,000 of taxable profit) exceeded $250,000. If the couple had a modified AGI of $260,000, for example, they’d have to pay the 3.8% tax on $10,000. With an income of $500,000, they’d owe the 3.8% tax on the full $100,000.
If your income puts you in the crosshairs for this upcoming tax hike -- and you anticipate a home-sale profit that exceeds the tax-free amount -- selling before 2013 would let you avoid the tax, notes William Massey, senior tax analyst with Thomson Reuters.