Confusion Reigns on Pending 3.8% ‘Real Estate Tax’

Ever since the passage of “Obamacare” in early 2010, the press has been rife with reports — many inaccurate — regarding how the new (effective January 1, 2013) 3.8% Medicare tax will apply to the sale of real estate, including the sale of one’s primary residence.  Many folks have become alarmed at the (inaccurate) assertion that every time a taxpayer sells a primary residence, he or she will incur the new 3.8% tax.

The National Association of Realtors has developed a brief and informative brochure on the subject (available online right here) which clarifies various of the important rules surrounding this impending new tax, which include:

  • The new tax only applies to single taxpayers with a modified adjusted gross income (MAGI) over $200,000, and to married taxpayers with MAGI over $250,000;
  • The tax would be 3.8% of the lesser of the taxpayer’s “net investment income,” (which would include capital gains) or the amount by which MAGI exceeds the threshold amount; and
  • Relative to the sale of one’s primary residence, the tax will only apply to any taxable gain (and not the gross sales price) arising from disposition of the property, meaning that the the gain would only be subject to the 3.8% to the extent such gain exceeds the $250,000 ($500,000 joint return) principal residence exclusion if the taxpayer otherwise qualifies for that benefit.