Confusion About Obamacare Tax On Home Sales

By Steve Barlotta, CPA

There seems to be a lot of confusion and misinformation about the Obamacare tax increase as it relates to the sale of primary residences. On several occasions over the past few months, I’ve had clients and friends ask me if the Obamacare health reform legislation includes a 3.8 percent tax on all home sales.The answer to this question is “no”.

As I mentioned in a prior blog, starting in 2013 there is a 3.8 percent Medicare surtax on investment income for single taxpayers making over $200,00 a year or married couples earning more than $250,000 a year.

Right off the bat, if your adjusted gross income does not go above these thresholds you will not be subject to this additional 3.8% tax. Also, keep in mind that there is a $500,000 capital gains tax exclusion for joint tax filers, and a $250,000 exclusion for single taxpayers on the sale of a primary residence.

Let’s assume a couple filing jointly has adjusted gross income of $300,000 in 2013. During the year they sell their home for $600,000 that they purchased ten years ago for $300,000. Even though their adjusted gross income exceeds $250,000, the sale of their home is not subject to the 3.8 percent Medicare surtax because their capital gain is $300,000, which is below the $500,000 exclusion.

Keep in mind these same rules don’t apply to vacation homes or rental properties. Using the same example above, if the property sold was a vacation home there would be an additional Medicare surtax of $11,400 ($300,000 capital gain times the 3.8% tax). So, in certain circumstances this Obamacare surtax will be substantial. But, the vast majority of  sales of primary residences will not be subject to this tax.