We recently received from a couple of our clients an "alarming" email warning that the Obama Health Plan was imposing a "secret" 3.8% surcharge on the sale of homes. So we decided to do some research. Here is the answer received from Cashion Drolet, Sr. VP of Government Affairs for the South Carolina Association of REALTORS®:
"As part of the health care reform package that was passed in 2010, there are a number of tax increases included as pay-for provisions. One of those taxes is the 3.8% medicaid surtax on investment income beginning in 2013 (including capital gains, rents, dividends, etc.). Note that Capital Gains do come from investment sale or transfer of real estate. The Medicaid Surtax is assessed on individuals earning over $200,000 individually or $250,000 as a couple. Thus, since real estate is a capital gains transaction and in the case of a sale of a principal residence for a gain of more than the exclusion amount ($250,000 individually or $500,000 for a married couple) then in addition to capital gains you could possibly have an additional medicaid surtax of 3.8% on top of that amount. This will only kick in for the income that is above the $200,000/$250,000 modified adjusted gross income. If you are not in a principal residence transaction and capital gains hits you right away (i.e. investment or rental income or a sale of principal residence held for less than 2 years) then if you have capital gains it could likely be hit with the 3.8% medicaid surtax - again if you are above the $200,000/$250,000 modified adjusted gross income levels."
Translation: If you sell your primary residence, and make a GAIN (after all qualified expenses are taken out) of less than $250K (individual)/500K (couple) OR you earn less than $200K (individual)/$250K (couple) this health surtax is NOT going to affect you in any way.