I'm Selling Real Estate in 2013 (Let's Say in the Palm Springs Area), Help Me Understand the New 3.8% Surtax on the Sale (Part 2)...

January 14, 2013
By Michael Brooks on January 14, 2013 10:24 AM |

Nothing brings a new law home like some examples, let's take a look:


1.) A single individual with a salary of $210,000, which exceeds the $200,000 threshold, could be subject to the 3.8% tax IF he also has "net investment income."

2.) A married couple with a combined income of $275,000, which exceeds the $250,000 threshold, could be subject to the 3.8% tax IF they also have "net investment income."

3.) A married couple have an Adjusted Gross Income (AGI) of $175,000, less than the $250,000 threshold, but have a "net investment income" of $100,000. Their Modified Adjusted Gross Income (MAGI) (MAGI = Adjusted Gross Income + "net investment income") is $275,000 ($175,000 + $100,000), exceeding the $250,000 threshold, making them subject to the tax.

4.) A married couple have an AGI of $240,000. Their total "net investment income" is $6,000, $2,000 of interest and $4,000 of dividends. The 3.8% tax would not apply even though they have "net investment income" as their MAGI 0f $246,000 ($240,000 + $6,000) is below the $250,000 threshold. But if they have the same interest and dividends plus a $10,000 capital gain, their MAGI would be $256,000. The excess of MAGI over the applicable threshold amount of $250,000 would be $6,000 ($256,000 - $250,000) and their "net investment income" is now $16,000 ($2,000 of interest, $4,000 of dividends and $10,000 of capital gains). Since $6,000 is less than $16,000, and the tax is calculated on the lesser, the 3.8% tax would be applied to the $6,000 and the tax would be $228 ((3.8% x $6,000).

5.) A married couple, purchased their primary residence 20 years ago for $100,000 and have lived in it since that time. Today, it is worth $700,000. If they sold it their profit would be $600,000. The first $500,000 of profit for a married couple selling their primary residence and meeting the ownership and occupancy tests would be tax-free, because of the couples federal home sales profit tax exemption of $500,000. The remaining $100,000 profit ($600,000-$500,000 exemption) would be "net investment income." The question would then be are they subject to the new 3.8% tax? That depends.
If their AGI was $175,000, the $100,000 "net investment income" capital gain profit would then be added to their AGI for a MAGI of $275,000 ($175,000 + $100,000). If the MAGI totaled less than $250,000, the new tax would not apply although they would still have to pay the capital gains tax on $100,000 profit. In this example, as the MAGI is $25,000 greater than the $250,000 threshold ($275,000 - $250,000), the new tax would apply. The new 3.8% tax applies to the lesser of the "net investment income," in this case $100,000, or the $25,000 that their MAGI exceeds $250,000 for a couple filing a joint return. As $25,000 is less than $100,000, the additional tax would be $950 (3.8% of $25,000).

6.) A married couple sold their principal residence for $525,000. They originally purchased it for $325,000. Their gain is $200,000, but they satisfy the ownership and occupancy requirements for the $500,000 couples federal home sales profit tax exemption of $500,000) and after applying the exclusion they have no capital gain and there "net investment income" is zero. Even though they have $300,000 of AGI, they are not subject to the new 3.8% tax as they have no "net investment income."

7.) A married couple inherited stocks and bonds that they liquidated. The sale
of these assets generated a capital gain of $120,000. Their AGI is $140,000 and their MAGI is $260,000 ($120,000 + $140,000). The excess of MAGI of $260,000 over threshold $250,000 is $10,000 ($260,000 - $250,000). The new 3.8% tax applies to the lesser of the "net investment income," in this case $120,000, or the $10,000 that their MAGI exceeds $250,000 for a couple filing a joint return. As $10,000 is less than $120,000, the additional tax would be $380 ($10,000 x 0.038).

8.) A married couple have total investment income from bonds, CD's, dividends, and capital gains of $145,000. Their AGI is $190,000 and their MAGI is $335,000 ($145,000 + $190,000). Their excess MAGI over the threshold of $250,000 is $85,000 ($335,000 - $250,000). The new 3.8% tax applies to the lesser of the "net investment income," in this case $145,000, or the $85,000 that their MAGI exceeds $250,000 for a couple filing a joint return. As $85,000 is less than $145,000, the additional tax would be $3,230 ($85,000 x 0.038).

9.) A married couple own a vacation home they purchased for $275,000. They have never rented it to others. They sell it for $335,000 and their second home sale capital gain is $60,000 ($335,000 - $275,000). The home sale profit exemption does not apply to second homes. In the year of the sale their AGI is $225,000 and their MAGI is $285,000 ($225,000 + $60,000). Their excess MAGI over the threshold of $250,000 is $35,000 ($285,000 - $250,000). The new 3.8% tax applies to the lesser of the "net investment income," in this case $60,000, or the $35,000 that their MAGI exceeds $250,000 for a couple filing a joint return. As $35,000 is less than $60,000, the additional tax would be $1,330 ($35,000 x 0.038).