Obamacare & Real Estate Taxes

Question: When does the tax for “Obamacare” when selling a house go into effect? How will it be calculated?

Answer: Always, when considering any real estate move, get your own tax professional on the horn, loop them into your plans, and get their advice. The tax is real so it behooves us to explore and understand how it works.

  1. Threshold No. 1: adjusted gross income. On Jan. 1 of this year, a new set of taxes to fund the health care program known as “Obamacare” went into effect. One of these taxes is a 3.8 percent tax on investment income, applicable only to singles with adjusted gross incomes greater than $200,000 and couples with adjusted gross incomes greater than $250,000. For the 95 percent of Americans who make less than this threshold, the tax doesn’t apply.
  2. Threshold No. 2: Capital gains exceed the exclusion. When a primary residence is being sold, the “Obamacare” tax applies only in situations where (a) the adjusted gross income falls into the high-income bracket stated above, and (b) the capital gains being realized on the home sale exceed the $250,000/$500,000 guideline.
    The larger impact of this tax is on investment and second-home owners who decide to sell. The capital gains exclusion guideline does not appear to apply for investment properties (including commercial real estate) and second or third homes, though taxpayers owning these sorts of properties still must meet the high-income guideline to incur this new tax.
  3. Calculating this tax is relatively simple — and revealing. If you do happen to be one of the chosen few to whom this new tax applies, the way the tax is calculated will depend on whether you are selling your personal residence or not. If you are selling your personal residence, the tax is 3.8 percent of your taxable capital gains. So, you are going to be taxed only on the amount above the $250,000/$500,000 exclusion.

If you are selling an investment property or a second or third home, again, assuming your income exceeds the $200,000 limit for singles and the $250,000 limit for marrieds, the 3.8 percent tax is applied to your investment profits, not the total proceeds of sale.

And that brings up one more implication for investment and vacation-home owners: It is possible that this 3.8 percent tax will now apply to your investment property income throughout the year, so long as you fall into the high-income category. This is just one more reason to connect with your tax professional and determine whether you should realistically expect to be impacted by this new tax.

That said, let’s put this all in perspective. The independent Tax Policy Center actually ran the math and projected that only 0.2 percent of homes that bring in cash income between $100,000 and $200,000 will actually pay any extra tax under this law, and the grand total of what they will pay is, on average, $235, considering all their sources of investment and nonwage income, not just home sale income.


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