Will Obamacare Tax Your Home Sale?

I’ve seen another round of chain e-mails and web postings about this, so here we go again: not everyone will be taxed on home sales under “Obamacare”.

The health care reform bill does indeed assess a 3.8% surtax on investment income, which would include gains on home sales. But the tax doesn’t apply to everyone.

The first question is: did you own and live in the home at least 2 out of the last 5 years prior to the sale?

The second question is: did you sell your home for more than you originally paid for it? The technical tax term for this would be selling your home for a gain.

If you owned and lived in your home for at least 2 out of the last 5 years prior to the sale, you can sell your home for a gain of up to $250,000 (if you’re single) or $500,000 (if you’re married) without being taxed on the gain.

The next question is, is your total income above $200,000 if single or $250,000 if married? If your income is less than this, the 3.8% tax doesn’t apply to you even if you have a taxable gain from the sale of your home.

Example:

John and Mary sell their home for $600,000. They originally paid $50,000 for it. Their gain is $550,000. Because they meet the 2-out-of-5 rule, they can exclude $500,000 of that gain. The $50,000 remaining gain will be subject to capital gains tax, but will only be subject to the 3.8% surtax if their total income, including the $50,000 taxable gain, exceeds $250,000.

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“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”