Are you subject to the new 3.8% federal sales tax on real estate transactions? There may be folks worried because they have read about the new federal sales tax when you sell your home. First relax, because the rumors are not true. Like a lot of false information that can spread quickly thanks to the internet, this one has just enough fact to seem true. You may remember the 2010 scare about how the IRS was going to start taxing your healthcare benefits in 2012.
What is the truth?
- Beginning in 2013 unearned income (things like dividends, interest and capital gains) will be subject to a 3.8% Medicare tax.
- The new tax would only apply to single taxpayers with a modified adjusted gross income (MAGI) of more than $200,000 and married taxpayers filing a joint return with a MAGI over $250,000 or $125,000 if filing separate returns.
- The tax is equal to 3.8% of the smaller of the taxpayer’s net investment income or the amount by which their MAGI exceeds the threshold amount above. For example a married couple with MAGI of $255K $205K of earned income and $50K of investment income only pay the tax on $5,000.
- Under Sec. 1411, a gain from the disposition of property (other than property held in an active trade or business) is subject to this tax. That means taxable gain on the sale of a personal residence in excess of the exclusion amount would be included. Taxpayers can exclude up to $250,000 ($500,000 for joint returns) from the gain on the sale or exchange of a principal residence provided they meet certain ownership and use requirements. So generally the first $250,000/$500,000 of gain is not even considered. In Summary-Only the gain may be taxable (not the full sales price) and only for taxpayers with MAGI over $200,000 (or $250,000 if married filing jointly) and finally only if the gain is over $250,000 ($500,000 if married filing jointly) do you add the overage to your other investment income to calculate the tax .