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.”

3 Responses to “Will Obamacare Tax Your Home Sale?”

  1. Tina Kritzer July 17, 2012 at 8:22 am #

    Great explanation Jason, very easy to understand. Have a great day!

  2. MA December 7, 2012 at 11:56 am #

    When is the 3.8% tax applied? Is it the mortgaged amount or the agreed upon sale price. Example As house is listed at $275,000. You offer $200,000 and the buyer agrees to this price. However, you put down a $50,000 to secure a loan of $150,000 will the tax be on the loan amount or the agreed offer?

    • Jason Dinesen December 7, 2012 at 4:12 pm #

      The tax would apply to the gain on the sale, based on the agreed-upon sale price. There are two things to keep in mind:

      1. The tax applies to the seller, not the buyer.
      2. The tax is based on the gain on the sale. Gain = sale price minus what the seller originally paid for the house. And, the seller can exclude up to $250,000 (or $500,000 if married) of gain from a home sale if they owned and lived in the home for at least 2 out of the last 5 years.

      If the seller doesn’t qualify for the exclusion, or if their gain is more than $250,000/$500,000, then the seller could be subject to the 3.8% tax … if the total of all their income, from all sources, is more than $200,000 if single or $250,000 if married.

      So the short answer is — it’s based on the sale price, and only affects the seller, not the buyer. And it only affects the seller in certain circumstances.