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October 17, 2012 / patrickbelhon

The Truth of the Home Sale Tax

The passage of the President Obama-endorsed health care law has brought additional worry to homeowners who may consider selling their homes. Buried on page 33 of the health care law is a provision for a 3.8 percent Medicare surtax on real estate sales that has many middle-class homeowners upset and angry at the possibility of paying extra taxes. The truth, however, is that despite the public outcry and chain emails spouting the contrary, this 3.8 percent tax will affect very few high-income homeowners.

The confusion over this tax stipulation is understandable given the highly technical wording and vague references to pre-existing tax code. The fact of the matter is that most middle-class home sellers will not notice a difference in their taxes under the health care law provision.

Tax Real Estate - The Truth of the Home Sale Tax

First, only individuals who earn a yearly income of over 200,000 dollars a year, or a married couple filing jointly who earns more than 250,000 dollars combined, will be subject to this tax. This already excludes most middle-class workers based simply on yearly income.

Second, under the existing tax laws, portions of the sale of a home are excluded from taxable income. In the event of a house sale, the first 250,000 dollars profit, or 500,000 dollars for a joint married couple, will continue to be excluded from income tax. For most middle-class homeowners, the 250,000 dollar amount will be more than enough to cover the income earned from the sale. These individuals will therefore not be subject to the additional 3.8 percent tax in the health care law.

There are some special stipulations in order to be excluded from this additional tax. According to the Internal Revenue Service, the seller must have owned the home and used it as a primary residence for at least two years out of the five prior to the sale of the house in order to qualify for the 250,000 dollar exclusion. Any home that is not a primary residence, such as a vacation home or a rental property, does not fall into the exclusion and will be subject to the 3.8 percent tax increase.

Of course, some people will need to pay the tax. Anyone who sells for more than 250,000 dollars, or 500,000 for a married couple, will be taxed on the amount of income earned over that threshold. For example, the home of a married couple that sells for 600,000 dollars will be faced with a tax on the 100,000 dollars over the excluded level, amounting to an additional 3,800 dollars in tax. Similarly, an individual who sells his vacation home on the beach for 150,000 dollars will still face the 3.8 percent tax on that entire 150,000 dollars because it is not a primary residence.

Much of the confusion over these numbers stems from a copy of an article written by a policy analyst at the Washington Policy Institute who claimed that the tax would affect most middle-class Americans. However, the Realtors association, the Tax Foundation, and several business reporters have been quick to refute that original statement. With more than half of all home sales around the 170,000 dollar mark, very few homeowners will be faced with the tax on their residences.

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