Question: With the introduction of the new healthcare tax laws in 2013, I have heard single filers can exclude up to $200,000 profit on the sale of a home. But I’ve also heard they can exclude up to $250,000. Which is correct?
Answer: Both are correct, but apply to different profit situations. That is, the Internal Revenue Code §121 principal residence profit exclusion remains an exception unaffected by the healthcare tax laws. Single taxpayers may still exclude up to $250,000 ($500,000 for couples filing jointly) on the sale of a principal residence. The taxpayer pays no taxes on the sale so long as the profit does not exceed the $250,000/$500,000 limit.
Another exception is §1031 tax exempt transactions, which include the sale of business use and investment property when sales proceeds are properly reinvested in replacement property. The profit is deferred and carried forward (through the cost basis), thus it is not reported and is not taxed.
Further, all other exclusions and exemptions of profits from reporting and taxes are unaffected by the healthcare tax. A profit reporting exemption leaves no part of exempt profits to be reported and taxed. Reported business income/profits were already subject to the healthcare tax.
All other reportable investment income (passive and portfolio) is only exempt from the new Medicare tax up to $200,000 for individuals and $250,000 for joint filers.
The healthcare surtax adds an additional tax of 3.8% on the lesser of:
- net investment income; or
- adjusted gross income (AGI) in excess of the $200,000 threshold for single filers, $250,000 for joint filers. [26 USC §1411(a)(1)]
Thus, if AGI exceeds net investment income due to business/personal income, net investment income is the only income subject to the 3.8% surtax, and then only to the extent your AGI exceeds the threshold of $200,000 for single filers ($250,000 for joint filers).