Contrary to reports and newspaper articles circulating widely on the Internet, there is not a “sales tax” or “transfer tax” on the sale of a home included in the recently signed health care reform bill. The analysis underlying these reports is incorrect.
Beginning in 2013, the health bill imposes a new 3.8% Medicare tax on “net investment income” earned by taxpayers with Adjusted Gross Income of more than $200,000 for individuals or more than $250,000 for married couples. Since capital gains are included in the definition of net investment income, a tax obligation might result from the sale of real property. In the case of the sale of a principal residence, the existing $250,000/$500,000 exclusion from capital gains on the sale of a principal residence remains unchanged. Therefore, even when the AGI limits are met, the new tax would apply only to the gain realized on a home sale in excess of the $250K/$500K existing primary home exclusion that pushes the filer’s AGI over the $200K/$250K adjusted gross income limit.
Here is the language from the bill:
“(a) IN GENERAL. – Except as provided in subsection (e) –
(1) APPLICATION TO INDIVIDUALS. In the case of an individual, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax equal to 3.8 percent of the lesser of –
(A) net investment income for such taxable year, or
(B) the excess (if any) of –
(i) the modified adjusted gross income for such taxable year, over
(ii) the threshold amount.”
The threshold amount in Sec. 1411(a)(1)(B)(ii) is $200,000 single, $250,000 married (1.5% of U.S. households).
The net investment income in Sec. 1411(a)(1)(A) includes interest, dividends, annuities, royalties, rents, and capital gains. Distributions from qualified plans or IRAs are not included. It does not make any distinction between qualified and ordinary dividends or between short-term and long-term capital gains. All dividends and capital gains are subject to the new Medicare tax equally.
So only those sales of real property that actually result is capital gains (which are rare) to the specified earners will be subject to the tax.
For example, on earned income of $50k, unearned of $210k – The extra 3.8% Medicare tax applies to the excess of MAGI over $250k, which is $50k + $210k – $250k = $10k, because it’s less than the $210k unearned income. Extra tax = $10,000 x 3.8% = $380. Again, this is only on income otherwise taxable as a capital gain, which most sales of real property are not.
Source (Maryland Association of Realtors)