From Our House...To Yours
There has been much discussion related to a tax on home sales that resulted from recently enacted health reform legislation. The new 3.8% Medicare contribution tax on net investment income does not take effect until years beginning after December 31, 2012.
For tax years beginning after December 31, 2012, a 3.8% tax will apply to net investment income of higher income taxpayers. The tax for individuals is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount.
The threshold amount is $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 in any other case. MAGI is AGI increased by the amount excluded from income as foreign earned income.
Net investment income includes interest, dividends, annuities, royalties, rents, and capital gains. The Medicare contribution tax does not tax items that are generally excluded from gross income, such as tax-exempt bond interest, veterans’ benefits, and the exclusion on gain from the sale of a principal residence (subject to applicable rules and limitations).
Tax on the sale of a principal residence for a married couple filing jointly is computed as follows (assuming no other investment income):
House selling price $ 900,000
Original cost including improvements ($300,000)
Personal residence exclusion - married filing jointly ($500,000) ($250,000 single)
Taxable gain $100,000
Tax rate 3.8%
Total Medicare contribution tax $3,800
A taxpayer who is contemplating selling his or her personal residence and who is expecting to realize a gain in excess of the applicable $250,000/$500,000 exclusion should consider completing the sale before the 3.8% Medicare contribution tax takes effect in 2013.
While the principal residence exclusion does not apply to second homes, the same consideration should be given to the timing of the sale of those assets.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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