Beginning January 1, 2013, a new 3.8 percent tax on some investment income will take e?ect. Understand that this tax WILL NOT be imposed on all real estate transactions, a common misconception. Rather, when the legislation becomes e? ective in 2013, it may impose a 3.8% tax on some (but not all) income from interest, dividends, rents (less expenses) and capital gains (less capital losses). The tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples ?ling a joint return with more than $250,000 AGI.
- Individuals with adjusted gross income (AGI) above $200,000.
- Couples ?ling a joint return with more than $250,000 AGI
Types of Income:
- Interest, dividends, rents (less expenses), capital gains
(less capital losses)
Formula: The new tax applies to the LESSER of
- Investment income amount
- Excess of AGI over the $200,000 or $250,000 amount
If John and Mary had a gain of less than $500,000 on the sale of their residence,
none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax
would depend on the other components of their $325,000 AGI.
Capital Gain: Sale of a Principal Residence
John and Mary sold their principal residence and realized a gain of $525,000.
they have $325,000 Adjusted Gross Income (before adding taxable gain).
the tax applies as follows:
AGI Before Taxable Gain $325,000
Gain on Sale of Residence $525,000
Taxable Gain (Added to AGI) $25,000 ($525,000 – $500,000)
New AGI $350,000 ($325,000 + $25,000 taxable gain)
Excess of AGI over $250,000 $100,000 ($350,000 – $250,000)
Lesser Amount (Taxable) $25,000 (Taxable gain)
Tax Due $950 ($25,000 x 0.038)