We have received many inquiries from clients and friends of the firm regarding the veracity of claims that the new health care legislation will impose a 3.8% Medicare tax on sales of personal residences beginning in 2013.
Are these claims true? The answer is: maybe.
The 2010 Health Care Reform legislation includes a provision to tax the net investment income of high-income individuals at the rate of 3.8%. The new tax on unearned income will be allocated to Medicare to help pay for health care reform. The tax will be effective for tax years beginning after December 31, 2012.
As noted, the tax will generally impact only high-income individuals; those filing joint returns reporting modified adjusted gross incomes of $250,000 or more, or more than $200,000 for single taxpayers.
The gain on the sale of a personal residence is subject to special tax rules. In general, the current tax rules affecting sales of personal residences provide for an exclusion of up to $500,000 of the gain on sale for married taxpayers and up to $250,000 for single individuals. The new Medicare tax will apply only to a taxable gain in excess of the $500,000 or $250,000 exclusion amounts. Therefore, reports circulating that the new health care legislation will tax the entire gain on the sale of your personal residence beginning in 2013 are false. Only those taxpayers who meet the high-income thresholds and are lucky enough to have a gain in excess of $500,000 (or $250,000 for single taxpayers) will have that gain subject to the new Medicare tax on unearned income beginning in 2013.
However, it should be noted that the gain exclusion rules apply to only one sale every two years. Accordingly, if you flip another house within this two-year period, the entire gain would be taxed and could also be subject to the 3.8% Medicare tax. Also, since there are some other quirky rules that apply to the gain exclusion on the sale of personal residences, you may wish to consult your Schneider Downs tax advisor before you sell your home to avoid any unpleasant surprises.
Gains from the sale of rental property will be subject to the new Medicare tax beginning in 2013. However, the tax will not apply to a 1031 exchange of rental property.
For now, worry less about the Medicare tax and more about being able to sell your house at all!
To talk more about the tax implications of this bill, please contact Ron Kramer, Director, Schneider Downs Tax Advisors.
Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.