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Monday, November 22, 2010

Is There a Sales Tax When I Sell My Home?

Lately, a number of my clients have asked whether the Patient Protection and Affordable Care Act (the PPACA, or “Obamacare,”) imposes a 3.8% sales tax on the sale of your home.

The answer is: “Kind of.  In a way.  Sort of.  Maybe.”

This tax will be imposed starting in 2013.

Here’s how it works.   According to Michael Maye, who wrote in the October 25, 2010 edition of “The Street,” the Medicare Investment Income tax, contained in the PPACA, is “calculated as the lesser of income over the $200,000 or $250,000 thresholds or unearned income. The lower of these two figures is multiplied by 3.8%. (The definition of "unearned income" is very broad. It includes interest, dividends, capital gains, annuities, royalties and rent. Excluded is tax-exempt interest and income from retirement accounts such as IRAs.)”

The reconciliation bill, HR 4872 (page 33) contains the language for this tax.  It provides for a tax on “net investment income,” which is defined as the sum of “gross income from interest, dividends, annuities, royalties, and rents,” which are not earned in the ordinary course of a trade or business and “net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property.”  It does not apply to property held in a trade or business.

You must look at several factors to determine whether you will owe Medicare Investment Income Tax when you sell your home, or when you have a gain on any investment.  First, the tax is not applied to the total sales price, so you must calculate your net gain.  Second, the tax is applied on the lesser of your income over $200,000 (or $250,000 for joint filers) or the net investment income (which includes your net gain.)  

When calculating your additional tax burden under the PPACA, don’t forget to include the increase in your Medicare Part A Taxes, which rise by.9% for individuals making over $200,000 a year or joint filers earning over $250,000. 

According to Mayes, a  federal income tax scenario for a high-income, two children, family in New Jersey with wages of $1 million; rental income of $36,000; book royalties of $7,500; dividends and interest of $50,000; capital gains of $100,000 (perhaps from the sale of a house); and investment income of $193,500 would result in two new tax payments.  The first would be a Medicare surtax of $6,750 ($750,000 multiplied by 0.9%) and a Medicare Investment Income tax of $7,353 (or $193,500 multiplied by 3.8%.)

Like any tax law, the whole thing is pretty complicated, and miscalculations can be expensive.  So, whether you will be liquidating stocks to pay for college, or selling the vacation home because you’re down-sizing, be sure to talk to your accountant and to the attorneys at Shoffner & Associates first.  Call us at 617-369-0111, or email Freya Shoffner at  We can help.

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