There is some confusion over the Medicare tax associated with the Patient Protection Affordable Care Act (PPACA), also known informally as “Obamacare.” As of January, 2013, the law requires a tax of 3.8% on unearned “Net Investment Income,” which includes the sale of a residence as well as some, but not all, income from interest, dividends, rents and other capital gains.
However, in the case of a home sale, the tax is applicable only on the portion of the seller’s net gain beyond the standard exemption. For single taxpayers, that exemption is $250,000; for couples filing jointly, it is $500,000. In addition, the Medicare tax is required only for individuals whose adjusted gross income (AGI) exceeds $200,000 and couples whose joint AGI exceeds $250,000.
Mr. and Mrs. Jones bought a home in Breckenridge, Colorado for $350,000 in 2011. Four years later, they sell it for $650,000—a net profit of $300,000. As a couple filing a joint return, they are allowed a $500,000 net investment income profit which is non-taxable. Since their net gain on the home was only $300,000, and their joint AGI is under $250,000, they do not have to pay the 3.8% Medicare tax.
Dr. and Dr. Smith bought a townhouse in Breckenridge, Colorado for $275,000 in 2008. In 2014, they sell it for $875,000—a net profit of $600,000. Since their profit is $100,000 over their allotted exemption ($500,000) and their joint AGI is more than $250,000, they are subject both to capital gains tax (usually about 20%) and the 3.8% Medicare tax on the $100,000.
If you are thinking about selling your Breckenridge home now or in 2013, I will be happy to provide a Comparative Market Analysis and help you understand any possible tax implications. I also recommend that you consult your tax professional before selling or buying a home. Please feel free to contact me.