What You Need To Know About The 3.8% Tax and Real Estate
1. It is not a tax on all properties. It is a tax on SOME investment income from interest, dividends, rents and capital gains.
2. It is not a tax on all people. Only individuals with an Adjusted Gross Income of $200,000 and couples with AGI over $250,000 will be included.
3. It is part of Health Care reform.
4. It is not a transfer tax, it is an income tax on investment income.
5. It does not affect the capital gain exclusions on the sale of a principal residence.Currently the first $250,000 of gain for a single person and $500,000 on a married couple is exempt from capital gains. The tax does, however, apply on amounts over the exemption.
6. What real estate does it apply to? For those taxpayers whose AGI is above the limits , the sale of a principal residence when the gain is over and above the exempt amounts, the sale of second homes and invest property and the income derived from investment property.
7. There is a separate tax for high wage and self employment business income. When investment property income qualifies as business income and not property earnings, the 3.8% does not apply, however a new tax of .9% is due.
Capital Gain: Sale of a Principal Residence
John and Mary sold their principal residence and realized a gain of $525,000. They have $325,000 Adjusted Gross Income (before adding taxable gain).
If John and Mary had a gain of less than $500,000 on the sale of their residence, none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax would depend on the other components of their $325,000 AGI.