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.
Image: FreeDigitalPhotos.net
Great explanation Jason, very easy to understand. Have a great day!
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?
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.