The new 3.8 percent surtax proposed by President Barack Obama, referred to as the "Medicare tax," will affect some high-income homeowners and real estate investors.
As with everything heading into this election campaign, the details are fuzzy. The surtax was passed in 2010 as a way to help fund health care reform and will go into effect in 2013. The tax will be imposed on individuals earning more than $200,000 or couples earning more than $250,000 for a portion of their investment income, including capital gains and rent.
Currently, capital gains tax is excluded from the sale of a primary home up to $500,000 for couples filing jointly and $250,000 for single filers. High-income earners with homes that sell for more than the excluded amounts could pay the surtax on the gains beyond those amounts. So if a wealthy married couple sells a home for a profit of $600,000, they could pay the surtax on $100,000 of the gain -- or only a portion of the gain. The amount owed will depend on how far above the income threshold they are, relative to the amount of the gain on the house. Confusing? You bet. The Internal Revenue Service will have to staff up just to answer questions from taxpayers.
When it comes to investment property, it doesn't get any less fuzzy. Investment property owners who have another job may be subject to the surtax, since they are required to report the rent as investment income, after expenses. However, a person who owns and rents property as a primary occupation may not be subject to the surtax.
The bottom line: You'll need your accountant's help more than ever if you fall into the income guidelines and sell an expensive primary residence at a sizable gain or own investment property.
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