Q: Is it true they’re going to impose a new 3.8% tax on the selling and buying of a home? This would mean a $15,000 tax on a house worth $400,000? Please say it’s just a rumor! –DL via email
A: It isn’t a rumor;
but it’s not as draconian as you’ve described it, either.
You’re talking about the new 3.8% tax on unearned income, which goes into effect in 2013. Its proceeds are earmarked to shore up Medicare, which is seriously underfunded and is about to be hit by a tidal wave of new beneficiaries as the baby boomers turn 65.
But in the first place, this tax will be levied only on single people with adjusted gross income of more than $200,000, and on married couples filing jointly whose adjusted gross income is more than $250,000. (The 3.8% tax applies to whichever is the smaller amount – your unearned income, or the amount by which your modified adjusted gross income for the year exceeds the high-income threshold. For more information about how the tax works, read this article at CNNMoney.com).
If you earn less, you won’t be affected by it.
In the second place, the 3.8% tax applies only to unearned income that exceeds existing tax exemptions.
When you sell your primary residence – i.e., a house that you’ve owned and lived in for at least two of the previous five years – you get a generous tax exemption on your profit: If you’re single, you owe no taxes on the first $250,000; and if you’re a married couple filing jointly, the first $500,000 of your profit is tax-exempt.
Your profit is the sale price minus your original cost, which includes capital improvements and transaction fees. So let’s say you sell your house for $400,000, and after deducting the price you paid for it and the capital improvements you made, your profit on the sale is $300,000.
If you’re married, you would have no taxable
profit: the entire $300,000 would be tax-free. If you’re single, your taxable
profit would be only $50,000.
Let's assume you're single. A 3.8% tax on that $50,000 profit would be just $1,900.
Of course, that wouldn't be your only tax. You'd also owe a capital gains tax on the $50,000.
The capital gains tax is
currently capped at 15%, but is likely to be raised to 20% in the future. If the
capital gains rate rises to 20%, and you’re also subject to the 3.8% additional
tax – probably a safe assumption in a year when your income is inflated by a
$300,000 profit on the sale of a house – you’d owe 23.8% in taxes on your
$50,000 taxable profit.
In other words, on total proceeds of $300,000, you'd owe $11,900 in taxes. All things considered, that's not a huge hit.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are addressed only online.
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