Home seller concerned about ‘3.8 percent tax’

The tax deadline is fast approaching, and the Herald's TaxSmart experts are here every Friday to help.

Today, Art Ford of Sullivan Bille Group discusses the new "3.8 percent tax" on investment income.

If we sell our home, will we possibly have to pay this new "3.8 percent tax" on investments?

Don't despair, let's explain.

The Obama administration enacted legislation effective in 2013 imposing an additional 3.8 percent tax on investment income.

It kicks in at certain thresholds — $200,000 of income for singles and $250,000 for married couples. If you are at these levels and have unearned income, including interest dividends, capital gains and other types of investment income, the 3.8 percent can apply.

Now how could this possibly apply to your home?

A qualifying personal residence brings with it an additional $250,000 to $500,000 exclusion on its sale depending on whether you are single or married. The sale produces capital gain income.

Assume Maria and Mike are married. They paid $200,000 years ago for their home and spent $100,000 on improvements. It's snowing. Mike is reading tomorrow's weather. There are 12 more inches on the way. They just got off the phone with their family in Florida. What could be better, snow today and tomorrow. There's a knock on their door. It's the parents of their neighbors. They tell you they like your home and want to buy it. You tell them you like your home, too. They say they realize that. Would $1 million help change your mind? They can close in two weeks and they own a moving company.

Maria and Mike have a nice home. It may be worth $500,000 to $1 million. They call their CPA. They discuss their total cost of $300,000. He explains they are eligible for a $500,000 exclusion and proceeds of $1 million will produce a taxable gain of $200,000. He explains this will be a capital gain still taxed at 15 percent, just under the new 20 percent rate, plus the Massachusetts tax. However, with this gain and their other income they will be above the $250,000 threshold for married couples, so they will pay this additional 3.8 percent tax on the $200,000, or $7,600.

That's how the new tax could hit you where you live, or used to live.

Email your tax questions to bizsmart@bostonherald.com.

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