It’s been (wrongly) claimed that the new “3.8%” Medicare tax will affect most, or even all home sales, so I’ve decided to post a brief explanation of what this tax really does, and how it may affect you. The key to understanding this issue is to realize that it’s like a capital gains tax, a tax on the appreciation of capital assets, like stocks and dividends, because home prices sometimes appreciate by a lot, in which case they’re like an investment. It’s important to tax capital gains, because the richest Americans – people like Warren Buffett and Mitt Romney – make their money almost exclusively from the capital gains on their investments.
So this tax is applied to the profit you make from your home sale; that is, the sale price minus the purchase price. But wait! - a huge portion of the profit from home sales – $500,000 – is exempt from this tax! So if you bought your home for $100,000, and sold it for $1 million, the tax would apply to $1,000,000 (sale price) – $100,000 (purchase price) – 500,000 (deduction) = $400,000. So you’d pay a total of $400,000 x 0.038 (3.8%), or $15,200.
One more thing, though: this tax is applied using a formula that factors in two things: the profit you make on your home sale, and your income, which combine to form your adjusted gross income (AGI). If your AGI is higher than $200,000 for individuals, or $250,000 for couples, then the tax applies to that income above those amounts. If not – the tax doesn’t apply at all. So, the calculated tax above would only be right if your family’s income was above $250,000; if not, it’d be less.
The truth is that this tax shouldn’t affect the vast majority of sellers – how many of us could sell our house at a $500,000 profit anyway? Only people whose homes have appreciated quite a bit. The tax is designed to affect only the very wealthy – by exempting people whose AGI is less than $250,000 – and those who use houses as investments (“flipping”) or own multiple homes. In other words, not the average home buyer or seller.
Northern Virginia home owners aren't your average home seller. We are an affluent area with high incomes and expensive homes. Maybe nationwide this isn't an important or valid topic, but we know this isn't the case in Fairfax and Loudoun Counties.
If you are concerned that this new tax law will affect you when you sell your home and need more detailed information, consult your trusted tax advisor. I am definitely not the expert in this field and wouldn't advise you. If you don't have a tax advisor contact me and I can refer you to someone fantastic.