Demystifying the Affordable Care Act and the 3.8 Percent Medicare Tax on Investment Income

As of January 1 this year, a 3.8 percent Medicare tax on investment income went into effect. However, it only applies to those who exceed the following adjusted gross income (AGI) levels, a figure that currently excludes about 96 percent of all U.S. households.

• Singles - $200,000 or greater AGI
• Married, filing a separate return - $125,000 or greater AGI
• Couples - $250,000 or greater AGI

The Medicare tax is not a sales tax, nor does it apply to all real estate transactions. Moreover, it’s a tax on investment incomes (which may or may not derive from the sale of a property) and typically won’t include capital gains resulting from the sale of a home, providing that home is a principal residence, and as we stated above, only for individuals or couples with AGIs above their thresholds.

The capital gains tax exclusion rule for sales of a principal residence ($250,000 for individuals, and $500,000 for couples) remains in effect. So, if the profits from the sale of the home don’t exceed these capital gains, they’re not tacked onto the net-investment income tally. Therefore, the 3.8 percent Medicare tax wouldn’t apply.

The bottom line is this:

1. If this is your principal residence and you sell your home for a profit above the capital gains threshold ($250,000 per individual or $500,000 per couple).
2. And your AGI (including the profit listed above in item 1) is above the threshold for your tax filing ($200,000 for individuals, $125,000 for married filing separate and $250,000 for joint income).
3. Then you are required to pay the additional 3.8 percent tax on any gain over the tax threshold.

That being said, the larger impact of this tax is on property owners when they sell:

• Investment property 
• Inherited investment property 
• Second or third homes that are not their principal residence.

The capital gains exclusion guideline doesn’t apply to any properties other than the principal residence. The 3.8 percent tax applies when the owners sell their property for a profit and now their AGI is greater than the tax threshold.

Capital Gain: Sale of a Principal Residence

Sale of a Second Home with No Rental Use

(or no more than 14-day rental)

Sale of an Inherited Investment Property

(Residential or Commercial)

Purchase and Sale of Investment Property

(Residential or Commercial)

All charts courtesy of the NATIONAL ASSOCIATION OF REALTORS®

Click here to download more information on this topic from the NATIONAL ASSOCIATION OF REALTORS®

This information is for general informational purposes and doesn’t constitute legal, account, tax or other professional advice or services. If you have questions concerning your tax liability or to determine whether you should realistically expect to be impacted by this new tax, please connect with your tax professional.

Please feel free to contact me with any real estate questions that you may have. I’m here to help others make real estate happen.

Warmest mahalo,
Kengo Ueno (R)

Kengo Ueno (R)

 
eCertified, ABR

Direct: (808) 739-4148
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email: kengo.ueno@pruhawaii.com

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