3.8 percent National tax on real estate sales

Let us sum up: The health bill included a provision that imposes a new 3.8 percent Medicare tax for some high-income households that have “net investment income.”  Any revenue collected by the tax
is dedicated to the Medicare hospital insurance program.
This new tax applies only to households with Adjusted Gross Income of more than $200,000 for individuals or more than $250,000 for
married couples.  Since capital gains are included in the definition of net
investment income, an additional tax obligation might result from the sale of
real property.  
But there are two major factors in figuring out the tax, which is complex.  Keeping in mind
that the new 3.8 percent Medicare tax is assessed only when the
$200K/$250K AGI limits are exceeded, the amount of net investment income subject
to tax is the LESSER of 1) total net investment income
OR 2) the excess of AGI over the $200K/$250K AGI limits.  

However, even when the AGI limits are met, the new tax would not be applied to capital gains that result from the sale
of a home, since the existing home sale capital gains exclusion rule still
applies – $250,000 (individual)/$500,000 (couple).  So if the gain from the sale
of the primary residence is below that amount, then NO Medicare tax will
have to be paid on the gain.  The new Medicare tax would apply only to a
home sale gain realized in excess of the $250K/$500K that pushes the filer’s AGI
over the $200K/$250K income limits.  
Some other quick points:
There is no such exclusion for the sale of a second home.
The new Medicare tax will take effect January 1, 2013.
The legislation makes no changes to the mortgage interest
deduction.
NAR has posted a detailed Q&A on this issue and on the new health care bill.  The Q&A will be updated as other provisions are developed.  

For more information on the tax provisions in the health care legislation, contact: Linda Goold, 202-383-1083, lgoold@realtors.org .
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