Q: My husband and I are considering selling our home in 2013. We are concerned about the 3.8% “home sales tax” which was buried in the ObamaCare bill. Our home is worth about $200,000 and we’ve lived in it for five years. A tax of $7600 would probably take almost half the profit from our sale. Is there a way to keep more of our profits? Marie in Rio Rancho
A: We have good news for you. You should get to keep all the profits from your home sales! There has been a lot of misinformation disseminated about this tax. Although we are not CPAís, the National Association of Realtors has produced several publications explaining it. We will use an example from their materials.
First, the tax is not on home sales, but on investment income – interest, dividends, rents (after expenses) and capital gains (less losses). There are also exclusions and income limits before the tax is applied. For instance: If your adjusted gross income as a couple is under $250,000 (or $200,000 for an individual) the tax would not apply. If you don’t make this much money, you can stop reading now. For the 3% of the population nationally that does earn this much, let’s go on. Say you sold your primary residence for $825,000. If you purchased it for $300,000 ten years ago your taxable capital gain after taking your $500,000 couple’s personal residence exclusion would be $25,000. ($825,000 – $300,000 = $525,000 – $500,000 exclusion = $25,000 capital gain.) The 3.8% tax would apply to this amount and you would pay $950. That’s not too bad after a $525,000 profit, right? These calculations get a little trickier when dealing with rental income from investment real estate, so we won’t go into that. This is why you have a CPA!
Bottom line, only a small percentage of people make enough income to even consider this tax law. Even those only need look at their investment income, not their earned income, or income from employment. Good luck on your home sale.
