DEAR BENNY: My sister recently told me of a friend who had to pay a tax on the sale of his mother’s house as a condition of the Affordable Care Act.
My daughter is selling her condominium. I think it would be extremely unfair to her if an additional tax or fee was assessed at the time of her closing.
Please advise; I don’t like surprises. – Frank
DEAR FRANK: This is a rumor that those who oppose ObamaCare keep trying to keep alive. Yes, there is a tax, but it is aimed at high-income consumers, who comprise a small majority of American citizens.
Let’s look at the true facts of this new law.
First, it is not a sales tax, nor does it impose any transfer or recordation tax. It is often called a “Medicare” tax because the moneys received will be allocated to the Medicare Trust Fund, which is part of the Social Security System.
Next, if your income (technically called “adjusted gross income”) is less than $200,000, you are home free. If you are married and file a joint tax return with your spouse, the law will apply only if your income is over $250,000. (If you and your spouse opt to file a separate tax return, the threshold is reduced to $125,000.) For all other taxpayers, you have to earn more than $200,000 in order to be under the new law.
The up-to-$500,000 exclusion of gain for married couples filing a joint tax return (or up-to-$250,000 for single taxpayers) has not been repealed. Nor has the right to deduct mortgage interest and real estate tax payment been eliminated.
According to statistics provided by the National Association of Realtors, the median average sale price for homes in the United States (as of July 2014) was $213,400. Clearly, none of these homes could make a profit of even $250,000, so if your daughter qualifies for the exclusion of gain requirements, she will not be impacted by this new law. Those requirements are that you have to have owned and used the property as your principal residence for two out of the five years before it is sold. The IRS calls this the “ownership and use test.”
Of course, in homes where a large profit will be made, some homeowners may be hit with this tax. But the large profit that you make should offset the nominal tax that has to be paid.
Since the law applies to all forms of real estate, including vacation homes, readers should consider consulting with your tax and financial advisors as to your exposure.
DEAR BENNY: I have a rental house which I have owned for 35 years. Its basis is now only $5,000 and it has a market value of $235,000. My wife and I might sell our $900,000 personal residence and downsize to our rental house. If we lived there for two years or more and then sold the former rental house for, say, $290,000, what would the taxes payable be? Would my wife and I be able to take the $500,000 exclusion and thereby shelter all of the gain? If we had taken the exclusion on our current house, could we take it again when we sell the second house? – Jon
DEAR JON: Your second question is easy. In order the claim the up-to-$500,000 exclusion of gain when you sell your principal home (or up-to-$250,000 if you file a separate tax return), you have to meet the so-called “ownership and use test.” That means that you have to have owned and lived in the home (which the IRS calls the “main home”) for two out of the five years before it is sold. Accordingly, you can claim this exclusion as often as you want so long as you meet the “ownership and use” test; in other words, you should be able to claim the exclusion every two years if you plan it right.
Your first question is more complicated, and I can only provide a basic explanation. According to IRS Publication 523, “Selling your Home,” “gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. Nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home.”
There are some exceptions, which are spelled out in the IRS publication. And although there is a worksheet in the Publication 523, it is complex and you should have your tax advisor assist you – before you make any moves.
Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: email@example.com.