Is the New Medicare Tax a Real Estate Tax? Not Exactly.

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.

For example:

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.