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.”

Comments

  1. MA says

    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 says

      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.