Dear Mr. Premack: My wife and I are planning on selling our home in
the near future. We are afraid that we’ll be exposed to the new $15,000
Obamacare tax when we sell. We think it is grossly unfair for the
government to take our money like this. Is there any exemption or way
around this terrible new tax? – MP
Let me begin by respectfully
stating that your understanding of the new tax is almost entirely wrong.
When Congress passed the new health care bill, they did indeed include a
new tax. But it is not a blanket $15,000 tax on the sale of all homes
(that was just an internet rumor). It is, in fact, a comparatively minor
tax that most people will never have to pay.
We all pay taxes on
our homes. Locally, we pay property taxes every year. On the federal
level, our homes are subject to capital gain taxes when sold (after
various are applied). Whether unfair or not, these old taxes affect all
homeowners, have been imposed for decades and their legality is accepted.
The new tax included in this health care law is also legal but will affect
a small minority of homeowners.
Here is how the new tax works. It
starts in year 2013. It is imposed on taxpayers who have taxable income
above $200,000 (for a single person) or above $250,000 (for a married
couple). If your income is below those levels, you are entirely exempt
from the new tax.
For those exposed taxpayers, the new tax is
3.8% of “net investment income.” When a homestead is sold, the capital
gain exemption is applied. Any single person selling a homestead receives
up to $250,000 in gain without having to pay capital gain tax. A married
couple exempts up to $500,000 in capital gain. When an exposed taxpayer
sells a homestead and has investment income smaller than the capital gain
exemption, the “net” investment income is zero and the new tax does not
Thus, in order to be exposed to the new tax, two things
must happen. First, you must have annual income above the $200,000 or
$250,000 limits. Second, you must have a capital gain above the $250,000
or $500,000 limits. Here are a few examples of how the tax law would be
1. It is year 2014. You are a single person, employed,
and making $220,000 per year. You own a home which you paid $300,000 to
obtain. It is your primary residence and homestead, and you decide to
sell. The market is good, and you get an offer of $600,000 for the home.
Step 1: Your income of $220,000 exposes you to the new tax, since
it is above the single person $200,000 limit. Step 2: Your gain on the
house is $50,000 above your exemption ($600,000 sale price minus $300,000
basis minus $250,000 exemption equals $50,000 taxable gain). Conclusion:
you pay 3.8% new tax on that $50,000 gain of exactly $1,900. There is no
flat $15,000 tax under the new law.
2. Same scenario, but the
sellers are married. Step 1: your income of $220,000 is below the $250,000
married-person limit. You are not exposed taxpayers. You are not subject
to the new tax (due to your income level) and are not subject to capital
gain tax (due to your $500,000 capital gain exemption).
married couple, but assume their income is $260,000, that their house was
purchased for $300,000 and they are selling it for $900,000. Step 1: They
are exposed taxpayers since their income of $260,000 is above the limit of
$250,000 for married persons. Step 2: The gain on the house is $100,000
($900,000 sale price minus $300,000 basis minus $500,000 exemption equals
$100,000 taxable gain). Conclusion: they pay new tax of 3.8% on that
$100,000 gain of exactly $3,800. There is no flat $15,000 tax under the
According to the National Association of Realtors, the
median home price in the southern US is about $158,000. If you are exposed
to the new tax then you are in the upper echelon of home sellers and wage
earners. The vast majority of retired seniors neither earn enough income
to be exposed to the new tax nor have homes valuable enough to be exposed
to the new tax.