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Will I pay an ObamaCare tax when I sell my home?

By   |  Posted in Ask The Expert

Q: Is there an 8 percent closing federal tax on the sale price of homes in 2014? I was told, but cannot find any info, that this "Obama tax" -- starting on Jan. 1, 2014 -- applied to sellers at closing on the sale price of their home. 

A: Not exactly, but you might pay a tax when you sell your house if you meet certain conditions. Some homeowners will pay a new 3.8 percent tax when they sell their homes; the good news is that there is a pretty high threshold before this levy eats away at some of your gain.

Are you subject to the tax?

This new tax on "unearned" income (interest, dividends, annuities, capital gains and other forms of income) kicks in if your Adjusted Gross Income (AGI) is over $200,000 (single) or $250,000 (married). However, a primary-residence home is a special case, as the first $250,000 ($500,000 for married) of those capital gains is not subject to tax, so you would need gains in excess of that $250,000/$500,000 level to create a tax liability.

The IRS defines a primary residence as one where you have owned and occupied for at least two of the five years prior to the date the home is sold.

Important considerations

Importantly, you are taxed not on the sale price of the asset, but rather the sales price less the acquisition price (what you paid for it); the difference between these figures is your capital gain. However, there are also allowances -- deductions from the total -- for certain documented home improvements (consult your tax advisor for details).

Here’s an example

So, if a married couple bought a house for $200,000 and sold it later for $600,000, the total capital gains (less any deductions allowed for improvements) would only be $400,000 and so not subject to the tax. This is true even if they are above the $250,000 income threshold; for the tax to occur in this case, they would need to both be above the $250,000 income threshold AND have capital gains in excess of $500,000 -- and even then, only the portion above $500,000 is subject to this 3.8 percent tax, not the entire $500,000-plus amount.

 As with all tax-related items, you should consult with your tax professional before making any decisions.

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