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"So, when I sell my home, do I have to pay a new tax?" This is the question on every home sellers' mind since news of the Affordable Health Care Act of 2010 broke.
According to the California Association of Realtors, beginning January 1, 2013, a new tax sometimes referred to as the "Medicare Tax" will take effect. Part of the Affordable Health Care Act of 2010, includes this new 3.8 percent tax on sellers that have an adjusted gross income of more than $200,000 (for a single person), $250,000 (for couples filing jointly), and $125,000 (couples filing separately).
Because this is a complicated tax law and will impact investor's differently, for the purpose of this blog, I will only be addressing home owners selling their principal residence with gains greater than the normal sellers' tax exemptions ($500,000 for married couples and $250,000 for individuals). To help you understand, I am including an example from The 3.8 percent Tax Real Estate Scenarios & Examples Brochure, written by the California Association of Realtors (CAR):
John and Mary sold their principal residence and realized a gain of $525,000. They have $325,000 Adjusted Gross Income (before adding taxable gain)."
The tax applies as follows:
AGI Before Taxable Gain $325,000
Gain on Sale of Residence $525,000
Taxable Gain (Added to AGI) $25,000 ($525,000 – $500,000)
New AGI $350,000 ($325,000 + $25,000 taxable gain)
Excess of AGI over $250,000 $100,000 ($350,000 – $250,000)
Lesser Amount (Taxable) $25,000 (Taxable gain)
Tax Due $950 ($25,000 x 0.038)
NOTE: If John and Mary had a gain of less than $500,000 on the sale of their residence, none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax would depend on the other components of their $325,000 AGI.
With this new tax, I recommend sellers talk to their accountants to verify their liabilities, because each home seller has different circumstances that may impact their tax rates when selling their home.
Written by Virginia Hall
ABR, CRS, e-Pro, GRI, SFR
Coldwell Banker Residential Brokerage