But It Will Apply in Some Limited Circumstances
Who would have thought that healthcare legislation would have created such a whirlwind among REALTORS® and homeowners? That is just what happened when the Health Care and Education Reconciliation Act of 2010 and Patient Protection and Affordable Care Act were signed into law in March 2010. Almost immediately after their passage, a series of emails began flying around the Internet, most with a kernel of truth but largely made up of misinformation.
We are not CPAs and are not tax professionals or experts so you should encourage your clients to consult their own tax advisor about their particular circumstances. That being said, here are the general details of the legislation that will potentially impact some home sellers.
The Acts impose a 3.8 percent investment tax on unearned income above certain levels to help fund Medicare. Many state attorneys general have filed lawsuits challenging the Acts, and the Supreme Court will have heard oral arguments on the topic by the time you have this magazine in your hand. Expect a decision to be issued sometime early this summer. If they are ruled to be legal and Constitutional, then the following aspect that is at the center of the emails will go into effect on January 1, 2013.
First, only taxpayers with Adjusted Gross Incomes (AGI) of above $200,000, if filing as a single person, or $250,000, if filing as a married couple, are affected.
Second, the capital gains exclusion on the sale of a primary residence of $250,000 for a single filer and $500,000 for a married couple still remains.
This means that assuming you are above the income thresholds, you would have to have a capital gain on the sale of your home that is more than $250,000 for a single person or $500,000 for a married couple.
Let’s look at an example. You are married and purchased a home for $1 million. You sell your home for $1.6 million.That gives you a capital gain of $600,000. First, congratulations. Second, the $500,000 capital gains exclusion still applies so you would only owe the new 3.8 percent tax on the balance of the capital gain, which would be $100,000. This would result in a tax of $3,800 in this situation.
Let’s look at another example. You are single and purchased a home for $500,000. You sell your home for $750,000. That gives you a capital gain of $250,000, all of which would fall under the capital gain exclusion for a single person, so you would owe no additional tax on that sale.
There are other details that impact who is affected and under what circumstances the tax would apply, so, again, please contact a tax advisor about your particular situation. Hopefully this help clear up some of the misinformation though. The next time you receive a forward of an email that says anything other than what you’ve read here, please forward them this article so they too can know the facts.