3.8% Tax — further clarification
Some additional clarification was needed regarding the 3.8% tax and how it affects the existing $250,000/$500,000 capital gains exclusion on a principal residence.
This is an excerpt from the FAQ's on NAR's site…
Q-10: Will the $250,000/$500,000 exclusion on the sale of a principal residence continue to apply?
A: Yes. Any gain from the sale of a principal residence that is less than $250,000 (individual) or $500,000 (joint return) will continue to be excluded from the income tax. The new 3.8% tax will NOT apply to this excluded amount of the gain.
Q-11: Will the 3.8% tax apply to any part of the gain on the sale of a principal residence?
A: Maybe. The new Medicare tax would apply only to any gain realized that is more than the $250K/$500K existing primary home exclusion (known as the “taxable gain”), and only if the seller has AGI above the $200K/$250K AGI thresholds.
So, for example, if the taxable gain was $30,000 and a married couple had AGI (which would include the taxable gain) of $180,000, the 3.8% tax would not apply because AGI is less than $250,000. If that same couple had AGI of $290,000, then the application of the 3.8% tax would be subject to the same formula described above. The $30,000 taxable gain on the sale would be less than the $40,000 excess above $250,000 AGI, so the $30,000 gain would be subject to the new 3.8% tax.
Here's the link to the FAQ page… http://www.realtor.org/small_business_health_coverage.nsf/Pages/health_ref_faq_med_tax?OpenDocument
In conclusion, it appears that the principal residence homeowner has to have more than the capital gains threshold AND be over the AGI limit, in order for the 3.8% Tax to be in play.