With the recent decision by the Supreme Court to uphold the Affordable Care Act, speculation regarding a 3.8% Medicare tax on real estate transactions has resurfaced. Although this provision of the law will not take effect until next year, a few friends and clients have expressed concern. Their basic question is, “Will I be taxed 3.8% on the profits from the sale of my home?”
Because the relevant provision of the law is highly complicated and not readily understood by anyone other than a tax expert, I visited FactCheck.org to see if I could get a simple and objective explanation.
For the sake of simplicity, let’s focus on the sale of a “principal residence”. The IRS recognizes a principal residence as a home the seller owns and has lived in for at least two of the five years prior to the sale. In cases where the property does not qualify as a principal residence, the tax implications will differ.
According to FactCheck.org, the law can potentially affect home-sellers with incomes greater than $200,000 annually (or $250,000 for married home-sellers who file taxes jointly). If your income meets these minimums, then the profit from the sale of your principal residence above the $250,000 threshold for individuals or $500,000 for couples may be subject to the tax. In other words, if you are a married couple that purchased your home for $300,000 and sell it for $900,000, you may be taxed 3.8% on as much as $100,000 ($600,000 profit less the $500,000 exclusion) – which comes out to $3,800.
If your annual income is less than $200,000 (or $250,000 for couples) or the profit on the sale of your home is less than $250,000 (or $500,000 for couples), you won’t pay the tax.
I hope this provides a basic picture of how the law may affect future home sales. Because I am not a tax accountant and this is only my simplistic view of a complicated law, I recommend consulting a qualified tax professional for advice. In the meantime, you may also want to check out FactCheck.org for more information.