Home-sale tax rumor persists

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Despite being declared constitutional by the Supreme Court, the health care reform law continues to come under attack.

The latest assault on Obamacare, as it’s popularly known, came Wednesday night at the Republican National Convention. Newly minted vice presidential nominee Paul Ryan took the opportunity in his nationally televised speech to excoriate the president’s signature piece of legislation.

But perhaps more damaging to the public perception of health care reform than any political rhetoric is an online tax rumor that just won’t die. Maybe you’ve gotten the email that warns:

“Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? That’s $3,800 on a $100,000 home, etc. When did this happen? It’s in the health care bill and goes into effect in 2013. If you sell a $400,000 home, there will be a $15,200 tax. Does this make your November and 2012 vote more important?”

This message isn’t trying to scam you out of any money, just your vote (which could cost you money, but that’s for another blog post). The email does, however, use the age-old con artist trick of taking a fact and then distorting it to the sender’s advantage.

In this case, the kernel of truth is that there is indeed a 3.8 percent tax that will take effect in 2013. It’s an added Medicare levy that will be assessed on the investment income, which could include some real estate sales, of higher-income taxpayers.

And it was created as part of the Patient Protection and Affordable Care Act (that’s the official name of Obamacare).

But the tax doesn’t apply automatically to everyone’s investment earnings and certainly not to all homeowners who make a profit on the sale of their homes.

Two new tax factors

There are two things to consider in determining whether you might owe this new tax next year.

First, look at your adjusted gross income. If next year it is more than $200,000 and you’re a single taxpayer or more than $250,000 if you’re married and file a joint return, then the 3.8 percent tax might apply. But if it is less than the threshold for your filing status, then that’s that. The new investment tax will not affect you.

But let’s say you are a high-earner under this tax’s guidelines. In that case you must calculate your profit from the sale of your home.

If you’re a single filer, you can net up to $250,000 on the sale of your principal residence and not owe any capital gains taxes on the income. The amount of profit excluded from tax for a married, jointly filing couple is double that.  If your home-sale profit falls within the exclusion limits for your filing status, the 3.8 percent tax won’t apply because you won’t have any investment income from your home sale to report.

However, if you are subject to the tax and your net home sale profit is larger than the exclusion amount, then you might owe the 3.8 percent Medicare tax. But only on the part of the home-sale gain over the applicable exclusion limit, not the entire sale proceeds.

That means that most people will not face the health care tax.

Remember, too, that you reduce any capital gains by selling assets that have lost value and using those losses to offset your taxable investment earnings.

Second-home owners, however, watch out. If you sell your vacation home, that profit could be subject to the Medicare tax.

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