1) You Don’t Have a Capital Gain
Due to the housing market, many homeowners no longer have a gain in their home. A gain is the sales price minus the cost basis. The cost basis is generally the purchase price of the property plus improvements. Improvements would include things like a new roof, new heating system or a deck being added to the home. Unfortunately many people have seen any potential capital gain disappear in recent years due to the market shifting.
2) You Can Exclude Up to $500,000 of Capital Gain
Married taxpayers filing a joint income tax return can exclude up to $500,000 of gain on the sale of their primary residence. Single taxpayers can exclude half of this amount or $250,000. So, even if you had a gain, there is a fairly significant exclusion. Although this law has been on the books for many years, most taxpayers are unaware of this exclusion. Keep in mind this exclusion only applies to your primary residence. It does not apply to a second or vacation home.
3) The New Medicare Tax Only Affects Taxpayers with Income Over $250,000
The Unearned Income Medicare Tax starts in 2013. This was part of the Affordable Care Act also known as Obama Care that was passed in 2010. This tax will apply to married taxpayers filing jointly with modified adjusted gross income of over $250,000. It will also apply to single taxpayers with modified adjusted gross income over $200,000. This tax will be assessed against unearned or passive income which includes capital gains. The tax is 3.8% of the passive income.
Will some taxpayers be subject to capital gains tax and the New Medicare Tax? Sure, at the higher income levels it is possible. Taxpayers that have very expensive homes may also be subject to this tax. The sale of a second home or vacation home may trigger a tax. For many taxpayers however they won’t have to pay any income taxes on the sale of their home.
What Can You Do About This Tax?
First, like all other areas of tax law, keep good records. Keep the settlement sheet from the purchase. Maintain a file with all of the improvements including the invoice and cancelled check. Take pictures of the home improvements.
Are you planning on selling your home? If so, have you looked at the possible tax ramifications?
Thomas F. Scanlon, CPA, CFP®