Q. I received an email that is making me think seriously about selling my house either this year or next. I'd planned to sell once I retire in five years anyway. Does it make sense to sell now to avoid this future 3.8 percent sales tax and rent until retirement?
A. Over the past few months, I've seen several versions of this email and have had several clients ask about the tax implications on the sale of their primary residence in 2013 and after, so your question is timely. I had to clean up the email because of its extreme political bias, inappropriate language and references to an organization, but the main message follows: Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on the proceeds? That's $3,800 on a $100,000 home, etc. When did this happen? It's in the health care bill, and the sales tax goes into effect in 2013. Under the new health care bill, all real estate transactions will be subject to a 3.8% sales tax. This bill will greatly affect the retiring generation, who often sell their homes and downsize.
The 3.8 percent tax is not a sales tax; it is a Medicare tax on investment income starting in 2013. It is a provision of the Patient Protection Affordable Care Act, health care legislation. Congress passed the legislation, and this new tax is seen as a way to help fund President Obama's health care and Medicare plans. The health care plan could be repealed or changed, but even if this happens, some experts expect a similar tax to take its place because of the budget deficit.
The 3.8 percent tax on investment income will apply only to those single taxpayers with modified adjusted gross incomes above $200,000, married taxpayers filing jointly with MAGI above $250,000, and taxpayers married filing separately with MAGI above $125,000. This is in addition to the new increase in the hospital insurance, commonly referred to as the Medicare payroll tax, for these same taxpayers. The hospital insurance tax is equal to 1.45 percent of covered wages with no wage cap. Beginning in 2013, an additional 0.9 percent will be added to any covered wages exceeding $250,000 for those married filing jointly, $200,000 for single filers, and $125,000 for those married filing separately.
For primary home sales, the entire exemption on capital gains remains intact for all taxpayers. As with all legislation, this could change, but right now the $250,000 capital gains exclusion for single taxpayers and the $500,000 for those married filing jointly remains and can be claimed every two years. The 3.8 percent Medicare tax is on the lesser of net investment income or MAGI that exceeds $200,000 if single, $250,000 married filing jointly and $125,000 married filing separately.
Examples:
Sue Single has MAGI of $250,000 and sells her primary residence for a gain of $275,000. Her taxable gain is $25,000 ($275,000 minus $250,000 exclusion) and is added to her MAGI to equal $275,000.
Excess MAGI over $200,000 equals $75,000.
Home sale excess taxable equals $25,000.
The 3.8 percent Medicare tax is applied to $25,000, so an additional $950 tax is owed.
Joe Single has MAGI of $175,000 and sells a second home for a gain of $100,000. His taxable gain is $100,000 since there is no exclusion on a second home. This amount is added to his MAGI to equal $275,000.
Excess MAGI over $200,000 equals $75,000.
Second home sale taxable equals $100,000.
The 3.8 percent Medicare tax is applied to $75,000, so an additional $2,850 tax is owed.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question.
