Market Boredom, My Daughters, and the Medicare Tax (in that order)
Question: What’s your excuse this time for not blogging for nearly a month, blogging being a medium whose success depends almost entirely on delivering consistent daily, if not weekly, fresh and compelling content?
Answer: Look! A butterfly!
OK, we’ll just call it distraction. Mixed with a little apathy borne out of sameness.
We are in the throes of a novel real estate market that lacks any of the necessary elements of a “good read” – excitement, intrigue, plot twists, a butler. What we have is a market bouncing around the bottom. It is showing signs of improvement, sure, but with no inventory to speak of, there just hasn’t been much to see here.
(For those who like stats, chew on this. We have a whopping 42 detached and 14 attached active listings in Scripps Ranch this morning – those out of approximately 8,000 and 4,000 homes standing respectively.)
Enter the distraction. My two daughters, the ones I relied on for years for my best material, have long flown the coop. And now that they are no longer resident at Chez Berg (except for the occasion trip home to visit my charge card), I have to work a little harder to keep up with their exciting lives. Stalking and creeping my way through their Facebook and Twitter and Instagram accounts takes a lot of time, let me tell you. It’s plain exhausting!
And it is easy to get distracted. While Daughter #1, the Capitol Hill Reporter, posts pictures of the Speaker of the House, Hillary Clinton, the cast of the Daily Show at the Reblican National Convention CNN Grill, and this guy….
my own photo journal looks something like this….
Meanwhile, for reasons I only later discovered, Daughter #2 who spent the summer working in custom content marketing on the NBC Studios backlot, is posting pictures like this one.
Apparently he’s is a famous monkey.
And as I spend time trolling the social media sites trying to find my offspring, I can’t help but notice the trending topics. I am reminded that (1) the Packers should have won Monday against Seattle and (2) we are in a political election cycle.
Which brings me to today’s topic: Affordable health care. Specifically, today’s topic is about the part of the Affordable Health Care Act involving a Medicare Tax on certain real estate transactions.
Much has admittedly been written about this. Yet Steve and I still are getting questions from neighbors, clients and at least one family member who, thanks to blast emails of misinformation warning us all to head for the nearest underground bunker, find themselves fuzzy on the specifics.
(First, the disclaimer. I am not an attorney, nor am I a CPA. Consult your tax advisor and so on and so forth because, if you find yourself being audited, “’cause Kris said so” will likely not be considered a valid defense.)
Keep in mind that I am only going to be talking about primary residences. For investment properties, it’s a bit more complicated. Having said that, here are the basic facts.
- Effective January 1, 2013, there will be a new 3.8% tax assessed when a property is sold.
- The 3.8% tax will only apply to “high income” taxpayers, defined as single filers with an Adjusted Gross Income of more than $200,000 or married couples filing jointly with an Adjusted Gross Income (AGI) of more than $250,000.
- The existing primary home exclusions will remain ($250,000/$500,000 for single and married filing jointly respectively). The new 3.8% tax will apply only to gains that exceed these numbers.
- For the squeakers, those close to the AGI limits, there is this. The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. The tax will be determined based on the LESSER of (1) net gain (over the current exclusions) OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds.
Clear as mud? Let’s try some examples. For ease, let’s assume the taxpayer in our examples is married and filing jointly.
- Your AGI is $5. The gain on the sale of your home is $500,000. No 3.8% tax.
- Your AGI is $5,000,000,000. The gain on the sale of your home is $500,000. No 3.8% tax for you.
- Your AGI is $251,000. The gain on the sale of your home is $600,000, which is $100,000 above the $500,000 exclusion. (Note that I took lots of math in college.) You will be taxed 3.8% of $100,000 (the net gain over the $500,000 exclusion), or $3,800.
- Your AGI is $Mitt Romney. The gain on the sale of your home is $600,000, which is $100,000 above the $500,000 exclusion. You will be taxed 3.8% of $100,000 (the net gain over the $500,000 exclusion), or $3,800. (And, may I suggest, this is the kind of problem you like to have.)
Now, here is where it gets tricky, and this applies to the folks hovering near the AGI limits.
- Your AGI is $5. The gain on the sale of your home is $600,000, which is $100,000 above the $500,000 exclusion. The 3.8% tax will be calculated base on the lesser of the $100,000 gain OR the excess over the AGI limit. In this case, the new AGI is $5 plus $100,000, or $100,005, which is less than the $250,000 limit. Oh, happy day! No 3.8% tax for you.
- Your AGI is $240,000. The gain on the sale of your home is $550,000, which is $50,000 above the $500,000 exclusion. In this case, the new AGI is $240,000 plus $50,000, or $290,000, which makes the excess equal to $40,000. You will be taxed 3.8% of $40,000 (because $40,000 is less than $50,000, duh), or $1,520.
- Your AGI is $0. The gain on the sale of your home is $1,000,000, which is $500,000 above the $500,000 exclusion. In this case, the new AGI is $500,000, which makes the excess equal to $250,000. You will be taxed 3.8% of $250,000, or $9,500.
To summarize, the Medicare tax will apply only to high income earners and only after the current primary home exemptions. And, keep in mind that the gain on your home is calculated by subtracting your cost basis from your sale price. The cost basis is not what you paid for it but the adjusted cost after taking into account the escrow, title, and other real estate fees you paid when you bought and sold, not to mention the cost of the new water heater you had installed in 1993.
It's quite possible I made a mistake here somewhere, so check my math carefully. There will be a test later.