Contrary to reports and newspaper articles circulating widely on the Internet, there is not a 4.0% “sales tax” or “transfer tax” on the sale of a home included in the health care reform bill signed last year. The analysis underlying these reports is incorrect and fails to take into account the interplay of the bill’s provisions with already existing real estate tax laws that remain unchanged.
What was included in the health bill is a provision that imposes a new 3.8% Medicare tax for some high income households that have “net investment income.” Any revenue collected by the tax is dedicated to the Medicare hospital insurance program. This new tax will only apply to households with Adjusted Gross Income (AGI) 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, an additional 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. Consequently, even when the AGI limits are met, the new tax would not be applied to all capital gains that result from the sale of a home. Rather, it would only apply to any home sale gain realized in excess of the $250K/$500K existing primary home exclusion that pushes the filer’s AGI over the $200K/$250K adjusted gross income limit.
The new Medicare tax will not take effect until January 1, 2013.
If you have a client in need of assistance preparing their tax returns or facing an IRS audit, I would be happy to assist them. Feel free to refer them to me using the information below.