I received a question from Laura who asked:

 

“I just received an email from a friend that said that there will be a 3.8% tax on all home sales after 2012 and that this tax is part of the Health Care bill. Do you know anything about this and can you clarify it?  Thanks.”

 

I’ve heard that one too, but it’s not exactly true.  Last week I wrote about a 3.8% Medicare tax on investment income which includes long term capital gain transactions of real estate—and that’s the rule that people are referring to when they talk about a sales tax on selling your home.

 

Let’s sort this out so you know exactly what’s going on.

 

Bottom line: if you sell your house after you’ve lived in it for at least two years, $250,000 of the profit is excluded from capital gains tax. ($500,000 if you’re married.) Let’s say your house cost $200,000 (this is usually referred to as “basis” in the tax prep world) when you bought it and you sell it for $400,000, that’s a gain of $200,000.  You’re not even in the running for paying the 3.8% Medicare tax because all of that gain was excluded from your income.  For you, this Medicare tax would not be an issue at all.  None of the proceeds from the sale of your home in this instance would even show up on your tax return.

 

Now let’s say you live someplace where the property values have gone up astronomically.  (Clearly you don’t live in my neighborhood if they did.  Our values just seem to drop while our property taxes go up.  Sorry, I’m whining.)  Okay, let’s say you live someplace where real estate values have increased way more than they have here in Missouri—then you could have an issue.

 

Let’s say you bought your house for $100,000 and sold it for $800,000 so that you’ve got a profit of $700,000. A $700,000 profit is a good thing!  Assuming that you’re married, you get to exclude $500,000 of that gain from the capital gains tax so you would only pay tax on the extra $200,000.

 

Let’s do the math:  $800,000 sales price – $100,000 purchase price = $700,000 capital gain.

 

$700,000 capital gain – $500,000 capital gain exclusion = $200,000 that you have to pay capital gains tax on.

 

A transaction like that will kick you into a high enough tax bracket to pay that extra Medicare tax in addition to the capital gains.

 

For most normal folks—we’ll never have to pay the Medicare tax on the sale of our homes.

 

If the value of your home has increased so much that you have to pay that tax—then to quote Charlie Sheen, “Winning!”   Seriously, you’d have gained $700,000 on the sale of your home.  That would be awesome.  And you’d only have to pay capital gains tax on $200,000 of it.

 

Right now—the capital gains tax for 2013 is scheduled to be 20% (who knows what Congress will say before the year is out but that’s what it’s scheduled to be.)  And the extra Medicare tax will be 3.8%.    So—let’s do the math on that:

 

200,000 taxable gain x .2 capital gains tax = $40,000

 

200,000 taxable gain x .038 Medicare tax = $7,600

 

So the total tax on that gain would be $47,600.  As bad as that sounds, remember we’re looking at a $700,000 gain to begin with so you’re really only paying 6.8% (or 47,600/700,000 * 100) tax on that amount.  Granted, we’re talking about one little example with crazy numbers—but remember—that’s for someone who has enough gain to have to pay in the first place.  Like I said earlier, for most of us—we’re looking at zero tax money spent on the sale of our homes.

 

(Note from editor:  So I checked the web and saw that many people were receiving emails claiming that there was this 3.8% sales tax on the sale of your home.  However, what these emails failed to explain was the exclusion amounts (250k single or 500k married) that are shielded from tax.  They later went on to criticize the health care bill and our current president.  Since it is an election year, you are probably more susceptible to emails or messages like this to try to get you to vote a certain way.  Do your research and keep checking in with this blog for the most recent and accurate information.)