Many erroneous rumors are circulating about a the 3.8% Federal Sales Tax on the sale of real estate. This relatively new tax may subject a seller to an additional tax on some of their home sale gain. It was created by the Heath Care and Education Reconciliation Act of 2010 (P.L. 111-152), codified at 26 USC § 1411. It applies to a limited number of real estate transactions closed on or after January 1, 2013.

The tax is 3.8% of the lesser of one of the following:

1.  The taxpayer’s net investment income; or

2.  The excess of modified adjusted gross income over the threshold amount ($250,000 for married couples filing a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others).

In addition, the existing Home Sale Capital Gains Exclusion Rule still applies - $250,000 (individual), $500,000 (married couple) to sales of primary residences. So, if the gain from the sale of the primary residence is below that amount, no Medicare tax will be due on the gain.

If you sell your home and have a profit after reducing the gain by the $250,000 home sale gain exclusion for single individuals ($500,000 for married couples), that portion of the profit is considered investment income, and is therefore subject to the new tax, if you are in one of the higher income categories listed in 2 above. To qualify for the home sale gain exclusion you have to own and occupy the home as your primary residence for two (2) of the five (5) years prior to the sale.

In summary, the Medicare tax would apply only to a home sale gain realized in excess of $250,000 / $500,000 that pushes the filer’s modified adjusted gross income over the $125,000 / $200,000 / $250,000 income limits.

Attorneys’ Title Guaranty Fund, Inc. does not provide advice on any income tax requirements or issues. Use of any information from this site or any linked or referenced web site is only for general information and does not represent tax advice, either express or implied. You are encouraged to seek professional tax advice for any income tax questions or assistance.