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.
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.
“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.”