Q: When does the tax for "Obamacare" when selling a house go into effect? How will it be calculated? –P.
A: First things first: Always, when considering any real estate move, from buying to selling, refinancing or even planning to rent for a number of years, get your own tax professional on the horn, loop them into your plans, and get their advice.
I say this upfront because I commonly see people worry and fret about tax issues that are not likely to ever be an issue for them, and vice versa: people wandering right into tax dramas they could have avoided if they’d gotten professional advice upfront.
And this "Obamacare" home sale tax issue is no different. Many who are worried about it needn’t be at all. Many who are unaware of the tax should be mindful of it.
Unfortunately, the mechanics of this tax have been conflated with the conversation about whether or not it should have been imposed. The latter question is a discussion for a different time, place and bat station. The tax is real for this moment, though, 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. So, this is the first threshold for which people should be mindful of this new tax: 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. On your primary residence, the tax code currently allows homeowners to realize $250,000 (singles) or $500,000 (married couples) in capital gains, or profits, on the sale of their home before taxing them. Keep in mind that this amount refers to profits above and beyond the purchase price and investments that have been made in the home during the time it was owned.
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.
On today’s market, very few people fall into this income range and are experiencing this level of profit on the sale of their home.
That said, I believe 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 much 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.
Tara-Nicholle Nelson is a real estate broker, attorney and the author of two critically acclaimed books on real estate. Tara also speaks and writes on the art and science of life transformation at RETHINK7.com.
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