Yes, there is a new 3.8 percent surtax that takes effect January 1, 2013 on certain investment income of upper-income individuals — including some of their real-estate transactions. When the Supreme Court upheld the health-care law on federal tax grounds, it restoked a housing issue that had been relatively quiet for the past year: the alleged 3.8 percent “real-estate tax” on home sales beginning in 2013 that is buried in the legislation.
It’s not a transfer tax and not likely to affect the vast majority of homeowners who sell their primary residences next year. In fact, unless you have an adjusted gross income of more than $200,000 as a single-filing taxpayer, or $250,000 for couples filing jointly ($125,000 if you’re married filing singly), you probably won’t be touched by the surtax at all, though you could be affected by other changes in the code if Congress fails to extend the Bush tax cuts scheduled to expire at the end of this year.
Even if you do have income greater than these thresholds, you might not be hit with the 3.8 percent tax unless you have certain types of investment income targeted by the law, specifically dividends, interest, net capital gains and net rental income. If your income is solely “earned” — salary and other compensation derived from active participation in a business — you have nothing to worry about as far as the new surtax.
Where things can get a little complicated, however, is when you sell your home for a substantial profit, and your adjusted gross income for the year exceeds the $200,000 or $250,000 thresholds. The good news: The surtax does not interfere with the current tax-free exclusion on the first $500,000 (joint filers) or $250,000 (single filers) of gain you make on the sale of your principal home. Those exclusions have not changed.
But any profits above those limits are subject to federal capital-gains taxation and could also expose you to the new 3.8 percent surtax. Here’s an example provided by the tax staff at the National Association of Realtors. Say you and your spouse have adjustable gross income (AGI) of $325,000 and you sell your home at a $525,000 profit. Assuming you qualify, $500,000 of that gain is wiped off the slate for tax purposes. The $25,000 additional gain qualifies as net investment income under the health-care law, giving you a revised AGI of $350,000. Since the law imposes the 3.8 percent surtax on the lesser of either the amount your revised AGI exceeds the $250,000 threshold for joint filers ($100,000 in this case) or the amount of your taxable gain ($25,000), you end up owing a surtax of $950 ($25,000 times .038).
The 3.8 percent levy can be confusing, and can bite deeper when your taxable capital gains are far larger or you sell a vacation home or a piece of rental real estate, where all the profits could subject you to the investment surtax. Definitely talk to a tax professional for advice on your specific situation.
Over the last several years, we have been proud to host luncheons to provide an opportunity to meet to discuss