New healthcare tax will impact few home sellersby Michele Lerner
The Affordable Care Act–recently upheld by the Supreme Court–includes a surtax on home sellers to help pay for increasing Medicare expenses. While this 3.8 percent surtax—set to begin at the start of 2013–sounds ominous and has even been erroneously described as a real estate transfer tax, it’s only going to impact a very small percentage of homeowners, says Linda Goold, the tax counsel for the National Association of Realtors.
“The important point to recognize is that this is not a transfer tax, so it will not be applied to all home sales,” says Goold. “There will be no impact on anyone who is buying a home.” Since sellers would need to make a profit of at least $250,000 before the tax could be imposed, at least on a principal residence, “only a tiny universe of people will be impacted,” she says.
Here are some general facts regarding the surtax:
- The surtax begins January 1, 2013, so the impact will be felt in 2014 when 2013 returns are filed
- The tax applies to individuals with an adjusted gross income (AGI) above $200,000, and to couples filing a joint return with an AGI above $250,000
- The surtax applies only to unearned income such as interest, dividends, net rental income and capital gains
Capital gains exclusion still in place
“Homeowners need to know that the capital gains tax exclusion for your primary residence is still in place,” says Mike Piershale, president of Piershale Financial Group in Crystal Lake, Ill. “This means that single taxpayers can exclude up to $250,000 in profits from the sale of their home and married taxpayers that file jointly can exclude up to $500,000 in profits.”
If you sell your residence and realize a profit, the unearned income surtax will only be applied to capital gains above the exclusion.
Who is most likely to be taxed?
“The people who are most likely to be hurt by this surtax are those who have one big capital gain in their lifetime, such as the sale of a vacation home that was never rented, or an investment property,” says Goold. (Vacation properties, depending on whether they have been rented and for how long, and investment properties are subject to capital gains taxes when they are sold.)
Calculating the surtax
While the IRS has yet to issue specific guidelines for the surtax, the healthcare bill establishes the following formula for the Medicare tax: The surtax applies to the LESSER of either your investment income or the excess AGI above the $200,000 or $250,000 limit.
“Taxpayers will need to look at both their AGI and the source of their income to determine how much of their income is subject to the 3.8 percent surtax,” says Piershale. “For example, if a married couple has an AGI of $280,000, with $50,000 of that income coming from investments and capital gains, then $50,000 of that income could be subject to the surtax. However, if you subtract the threshold amount of $250,000 from $280,000, then they are subject to tax on only $30,000 of additional income because that’s the lesser number.”
Piershale says the long-term capital gains tax rate will rise 5 percent next year to 20 percent, so sellers of second homes and investment properties could end up paying as much as 23.8 percent on their profit if they are subject to the surtax.
Piershale says the majority of home sellers will not be subject to the surtax because of the protection of the capital gains exclusion on principal residences. However, you should consult a tax advisor if you intend to sell a home and expect to make a large profit on the sale, particularly if you are selling a second home or an investment property.