Monday, September 17, 2012

New tax on home sales is overblown rumor

It's not quite up there with alligators living in sewers, but an urban legend is forming around a provision of the Affordable Care Act recently upheld by the Supreme Court.

The health-care legislation touted by President Barack Obama includes a provision that could result in a partial capital-gain tax on homes sold by a small number of taxpayers. But e-mail blasts claiming all transactions would be subject to a housing sales tax are inaccurate, experts say.

At issue is the new 3.8 percent tax on the investment earnings of upper-income households. This provision, designed to help fund Medicare, will take effect in January unless Republicans in Congress can follow through on vows to scuttle it.

"That provision provides the rumors with a kernel of truth," wrote Jack Hagel and Alistair Nevius for the Journal of Accountancy. "A very small number of taxpayers will pay a surtax on gain from the sale of a principal residence."

One e-mail message making the rounds discusses the Medicare levy as "a ploy to steal billions" from unsuspecting homeowners through a sales tax on housing.

"Did you know that if you sell your house after 2012, you will pay a 3.8 percent tax on it?" the message states, and then gives examples of a $3,800 tax on a $100,000 sale and a $15,200 tax on a $400,000 transaction.

"Under the new health-care bill, all real-estate transactions will be subject to a 3.8 percent sales tax," the message states, erroneously. "This bill is set to screw the retiring generation, who often downsize their homes."

The website of the National Association of Realtors points out that the 3.8 percent surcharge isn't a sales tax. Further, the group notes that the new law doesn't eliminate the ability of single homeowners to exclude up to $250,000 in gains on a principal residence, or $500,000 in gains for married couples filing jointly.

"Thus, only that portion of a gain above those thresholds is included in (adjusted gross income) and could be subject to the tax," reads an NAR statement.

(To qualify for the $250,000/$500,000 exclusion, you also must have owned the home for at least two of the five years preceding the sale date, and you need to have lived in it as your main residence for at least two of those five years.)

If you think you might have a taxable housing gain, you should first determine whether you're subject to the 3.8 percent tax. It will apply only to a small number of taxpayers with modified adjusted gross income above $200,000 (singles) or $250,000 for joint filers. Only 2.4 percent of the 2.7 million federal tax returns filed by Arizonans in 2010 reported AGI of $200,000 or more, according to the Internal Revenue Service.

Next, calculate the size of any taxable housing capital gain. Even people with incomes above $200,000/$250,000 can exclude much, if not all, of their profit. As noted above, singles can exclude the first $250,000 in capital gain on the sale of a primary residence, and joint filers can subtract $500,000. When figuring your gain, exclude what you paid for the property and what you spent on improvements such as adding a bathroom. Together, the original purchase cost and later reinvestments are known as a home's "basis."

"So, a $100,000 gain on the sale of a principal residence would not be subject to the tax, and even a $400,000 gain on the sale of a principal residence would not be subject to tax for joint filers," said Mark Luscombe, principal analyst at tax-researcher CCH Inc.

Finally, the 3.8 percent tax, if applicable, is levied against the smaller of two numbers. The first number is your gain or net investment income from the home sale, as calculated above. The second is the amount by which your adjusted gross income exceeds $200,000 (singles) or $250,000 (married couples filing jointly).

Hagel and Nevius provide an example: Suppose you and your spouse bought a home years ago for $350,000, and then you sell it for $900,000. After excluding $500,000 from the $550,000 gain, you're left with $50,000 in investment income/gain.

Now suppose you and your spouse have adjusted gross income of $325,000, including the $50,000 from the home sale. Your AGI of $325,000 is $75,000 above the $250,000 income threshold for joint filers, but the tax wouldn't apply on this $75,000. Rather, you would face a tax on the smaller number -- the $50,000 net investment income/gain.

In short, $50,000 would be subject to the 3.8 percent surtax, and you would owe $1,900 from the home sale. That's a far cry from paying tax on the full $900,000 proceeds.

It's worth noting that some homesellers could owe regular capital-gain tax in addition to the 3.8 percent surtax. Also, the gain on the sale of a second home wouldn't qualify for the $250,000/$500,000 exclusion and thus would be fully included as net investment income, said Luscombe.

Gains on rental real estate might not qualify for exclusion, either. "That capital gain would generally be subject to the 3.8 percent tax on net investment income, unless the gain is derived from property considered to be held in an active trade or business," Luscombe said. "Therefore, real-estate professionals would not be subject to the tax, but real-estate investors would be."

In short, this provision is confusing and subject to misinterpretation, but most homesellers won't be affected by it.

Reach the reporter at or 602-444-8616.
Are you in line for the tax?

The Affordable Care Act contains a provision that could impose a 3.8 percent tax on part of the gain from the sale of a primary residence. Here's how to tell:

Figure your adjusted gross income. If your AGI, including any taxable gain from the home sale, exceeds $200,000 (singles) or $250,000 (joint filers), then the 3.8 percent tax might apply.

Determine the size of your taxable gain. The tax applies only on part of the gain, not overall proceeds, from a home sale. To figure it, subtract your original purchase price and the cost of improvements made over the years (collectively known as a home's "basis") from the sale proceeds. Then subtract the $250,000 exclusion amount for singles or $500,000 for married couples. Most people selling a home won't have a taxable gain.

Compare the resulting gain with your income. The tax, if any, applies on the smaller of two numbers. The first is your taxable gain from the home sale (after the $250,000/$500,000 exclusion). The second is the amount of your adjusted gross income that exceeds $200,000 (singles) or $250,000 (joint filers). Most people won't owe the 3.8 percent tax on either figure.

by Russ Wiles - Aug. 10, 2012 The Republic |

New tax on home sales is overblown rumor

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