An often less talked about portion of the massive legislation known as ObamaCare is how the government is going to pay for it. The great majority of the bill pertains to matters that have nothing to do with healthcare. It may surprise you, but some of the needed revenue will come from the sale of real estate – kind of.
Effective January 1, 2013, a new 3.8% tax on investment income will be imposed. This tax does not affect all real estate transactions, only when certain conditions are met.
Here’s what you need to know from a capital gain/real estate perspective:
- Is your AGI greater than $200,000? The 3.8% tax is on the LESSER of your investment income amount or the amount in excess of Adjusted gross income (AGI) over $200,000 (Individual) or $250,000 (Couple). Therefore, if your AGI (which includes real estate sale gains) is less than $200k (or $250k) you are not affected by the new tax.
- Your AGI will include the sale of investment income (or real estate). Say you make $100k salary and sell your vacation home for a profit of $225k – your AGI will be $325k and you’ll be subject to the 3.8% tax on $125k ($325k-200k).
- You get a $500k deduction for the sale of your primary residence. If you sell your primary residence for a gain of $550k, you get to deduct the first $500k and are left with a gain of $50k to be added to your AGI.
- The tax is paid by the individual via their tax return and is NOT something the closing agent has to withhold.
- Your investment gain is zero [$350k sale price – $500k exemption = negative (zero)]. No gains are added to your salary/AGI.
- Your AGI is $15k in excess of the $200k deduction ($215k salary + $0 investment gain -$200k deduction).
- The lesser of $zero and $15k is zero. Therefore, you do not owe the 3.8% tax.
- Your investment gain is $100k. This was not your primary residence, so you don’t get the $500k deduction.
- Your AGI is $115k in excess of the $200k deduction ($215k salary + $100k investment gain -$200k deduction).
- The lesser of $100k investment gain and $115k excess is $100k. Therefore, tax is due in the amount of $380 ($100k x 3.8%).
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