There are a bunch of emails floating around out there that included within the new ObamaTax-icare System is a 3.8% tax on the sale price of your home.  While we can disagree on the merits of ObamaCare (I for one am strongly against it) we must get the facts right.  It is not true that there is a 3.8% tax on the sale price of your home … HERE ARE THE FACTS …

Origins: One of the provisions in the reconciliation bill (HR 4872) passed in conjunction with the Patient Protection Affordable Care Act (PPACA) health care legislation calls for high-income households to be subject to a new 3.8% Medicare tax on investment income starting in 2013:

The PPACA creates a new Code Section 1411, which will generally impose a 3.8 percent tax on the lesser of “net investment income” or the excess of modified adjusted gross income over a “threshold amount” (generally, $250,000 for taxpayers filing a joint return, $125,000 for married taxpayers filing a separate return and $200,000 in all other cases). Net investment income generally means the excess of (i) interest, dividends, annuities, royalties, rents, income from passive activities, income from trading financial instruments and commodities, and gain from the disposition of certain non-business property, over (ii) allowable deductions properly allocable to such income. In determining the amount of net investment income, special rules apply with respect to dispositions of equity interests in certain partnerships and S corporations, and to distributions from certain qualified plans. This additional tax applies to taxable years beginning after December 31, 2012.

This is a complicated section of a complicated piece of legislation, and the 3.8% Medicare tax has been frequently misreported as amounting to a 3.8% “sales tax” on all real estate transactions. This is incorrect: the Medicare tax is not a sales tax, nor does it apply to all real estate transactions; it is a tax on investment income (income which may or not derive from the sale of property) only for persons who earn more than the amounts specified in the bill.

First of all, the Medicare tax will be imposed only on individuals with an income above $200,000 and couples with a joint income more than $250,000, a figure which currently excludes about 97% of all U.S. households. Second, the tax will not be assessed on every house sale, but only on real estate transactions that produce profits over a specified dollar amount. As Sara Orrange, Government affairs director of the Spokane Association of Realtors noted in response to a repetition of the “sales tax” rumor in the Spokane Spokesman-Review:

For example, let’s assume that a couple with an income of $325,000 bought a house in 2004 for $300,000 and resold it in 2013 for $850,000, thus producing a $550,000 profit. Since U.S. law allows a couple to exclude from their gross income profits of up to $500,000 from the sale of their principal residence, the taxable gain from this sale would be $50,000 (i.e., a $550,000 profit minus the $500,000 exclusion), and the couple’s taxable income would now be $375,000 (i.e., the original $325,000 plus the $50,000 of taxable profit from their home sale). The 3.8% Medicare tax would now apply to whichever of the following dollar figures is the lesser:

a) The amount by which the couple’s taxable income now exceeds the $250,000 income threshold level.

b) The amount of taxable income gained from the sale of their home.
In case (a), the dollar figure would be the couple’s taxable income ($375,000) minus the income threshold level ($250,000), or $125,000.

In case (b), the dollar figure would be amount of taxable income gained from the sale of their home, which, as detailed above, was $50,000 (i.e., $550,000 profit minus the $500,000 exclusion).

The second dollar amount is the lesser of the two, and therefore the couple would have to pay an additional tax of 3.8 percent of $50,000, which would amount to $1,900. (If the hypothetical couple had realized less than a $500,000 profit on the sale of their residence, none of that gain would be subject to the 3.8% tax.)

The referenced tax is therefore not a tax on all real estate sales; it is an investment income tax which could result in a very small percentage of home sellers paying additional taxes on home sales profits over a designated threshold amount. In short, if you’re a “high earner” and you sell your home at a substantial profit, you might be required to pay an additional 3.8% tax. However, given that only about 3% of U.S. households have incomes that exceed the specified income threshold amount, the existing home sale capital gains exclusion on a principal residence ($250,000 for individuals, $500,000 for couples) still stands, and the national median existing-home price in January 2012 was only $154,700 , the Medicare tax will likely affect only a very small percentage of home sellers when it is implemented in 2013.

The 3.8% Tax: Real Estate Scenarios & Examples (National Association of Realtors)

So whether you are going to have a tax liability or not, and please do consult with your accountant to verify all the information above, the fact remains, what’s the single best way to get the highest price for the sale of your home?  The answer is simple – “Marketing 101” as they say, and that’s to have the greatest number of buyers competing for your home.  But, that begs the next question, right?  “How do I do that?!”  It’s all about the internet folks.  Take this example on how I was able to get a record breaking price in a down market for a Palos Verdes home