Your Home and the 3.8% Investment Income Tax

When the 3.8% net investment income tax was enacted, there was a lot of talk about whether it applies to taxes on home sales. Here’s how that really works.

When you sell a home that isn’t your principal residence, such as a vacation home, second home, or rental property, all of the gain potentially is subject to the 3.8% tax. You’ll have a capital gain from the sale of an investment asset.

When you sell your principal residence, however, the investment income tax applies only to the amount that is included in gross income. On the sale of a principal residence, up to $250,000 of gain is exempt for singles and $500,000 for married couples filing jointly. Remember that only gain is potentially taxed, not the sale price of the home. First, you subtract from the sale price the basis of the home, which includes the original cost plus the cost of any improvements. Second, you subtract selling costs such as broker’s commission and closing costs. Only the sale proceeds above that amount are potentially taxed, and only if it exceeds the exempt amount.

For most people, the sale of a principal residence isn’t likely to be subject to the 3.8% investment income tax. Also, none of the sale proceeds are likely to be included in gross income, increasing your AGI so that it is high enough to trigger or increase the 3.8% tax on your net investment income.

RW June 2013.