Will Obama Care Add Taxes to Your Home Sale?

Worried Grandmother

**This article was written one year ago to answer questions about the effect of the proposed Obama Care plan would effect home sales**

I got a scary email…

The interwebs have blown up recently with scary emails and Facebook postings, all indicating that Obama’s Health Care plan had a hidden 3.8% tax on your house sale.

The email (one of which was forwarded to me by one of my Big Brothers) says, in part, “Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it?  That’s $3,800 on a $100,000 home, etc.”

Is that true?!

Well- as with all effective lies, there is, in fact, a grain of truth at the center.

There is a 3.8% tax included in ObamaCare.  That tax could be applied to some of the proceeds of some of the home sales.  But, not all, and some might say, “not many”.

Let me explain.

The tax is applied to investment income and is only applied to people with adjusted gross income (AGI) over $200,000 for individuals and $250,000 for families. The 3.8% is only applied to EITHER the investment income amount or the excess over the $200k/$250k limit, which ever is smaller.

(This tax is complicated, so only use my examples as illustrations- your individual results may vary!)

When would I pay this tax?

You would owe tax if you add your investment income to your AGI and it totals more than $200k/$250k.  The amount taxed would depend.  Which is smaller, the total investment income or the difference between your total AGI (regular income + investment income) and the $200k/$250k limit?

Give me an example.

John and Mary sold their principal residence and realized a gain of $525,000.
They have $325,000 Adjusted Gross Income (before adding taxable gain).
The tax applies as follows:

Regular AGI $325,000
Gain on House $525,000
Capital Gain Exclusion = $500,000
Total Taxable Investment Income $25,000
Total AGI (Regular Income + Taxable gain) $350,000
Excess of AGI over $250,000 limit= $100,000

Ok, at this point, we have to ask which amount is smaller, the investment income ($25,000) or the excess over the $250,000 limit?  Obviously, it is the investment income of $25,000.  The 3.8% tax is applied to the $25,000 investment income and that amount is $950.

It is worth pointing out that if Joe and Mary had regular AGI of $175,000 this tax would not apply.

So, it’s just the rich people who must pay.

Not Quite!!!

No one would mistake Great Aunt Mary for a rich person.  She is on a small fixed income and all her “wealth” is in the value of her home.  It is time to sell so that she can move to a smaller home.  Aunt Mary is a widow, so her capital gains exclusion is $250,000.  She $45,000 for her home 50 years ago, and she is looking at a $750,000 gain.

Regular AGI $35,000
Gain on House $750,000
Capital Gains Exclusion $250,000
Total Taxable Investment Income $500,000
Total AGI $785,000
Excess over $200,000 limit $$585,000
The smaller of the two numbers is $500,000.  
Tax that at 3.8% and she now owes $19,000.  Ouch.  

So, my Mom had better sell this year?

I don’t know that this tax is big enough to radically change anyone’s plans.  However, if the family has been thinking that Mom should consider a move, soon, I would really try to do so this year.

Conditions have not been this good for home sellers in many years.  Inventory is ridiculously low and demand is very, very strong.

If this describes you and your family, let’s talk.  I look forward to meeting you, I look forward to helping!

About Kendyl Young

3 Responses to “Will Obama Care Add Taxes to Your Home Sale?”

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  1. Great article with simple explanation of what appears to be a complicated tax for some to understand.
    Thanks Kendyl very well done.

  2. Kendyl Young says:

    Thank you Andrea! I hope that it helps to take away some fear and hysteria.

  3. Great, great, great post! I’ve got to admit that this is one of the things I didn’t quite get and sounded a little scary. Love the fact that you jumped in to address it and did so clearly. <3

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