We've gotten numerous inquires lately about whether aspects of the new tax laws Congress passed last year create a substantial tax penalty on the sale of primary residences. Do they create a disincentive to home ownership?
We realized that a bit of clarity is needed to dispel misinformation.
Here are reference points you can use when confronted by this evolving urban legend:
• The effective date is not until January 2013.
• One tax is calculated on unearned investment income or the excess over the adjusted gross income (AGI) -- whichever is less.
• The first $200,000 of AGI is not taxed for an individual, and the first $250,000 is not taxed for couples filing jointly.
• The unearned investment income tax amount is calculated at 3.8 percent of some investment income such as interest, dividends, rents (minus expenses) and capital gains (minus capital losses).
• A second tax on earned income for high wage earners and self-employment business income over the AGI limits is calculated at 0.09 percent.
• The tax shelter of the first $250,000 of gain for individuals or $500,000 gain for couples on the sale of primary residences is still available and not subject to either tax.
Omitting any of the points above could lead one to think the tax will have a greater monetary effect than will actually occur for most individuals.
We've provided three examples to help you see the monetary effect of the taxes.
To determine your AGI, look at the last number of the first page of your tax return (Line 37 on your 2009 tax return).
Remember everyone's tax situation is different, so consult your tax adviser to make certain that the new tax rules are applied correctly to your financial situation. Your tax situation could be more complicated than the examples shown if it involves the sale of inherited property, tax-deferred exchanges or second homes.
Clair and Barbara Ramsey are local associate brokers specializing in residential real estate. Their column appears every fourth Sunday. Their e-mail address is firstname.lastname@example.org.
Tax for married couple, with sale of a principal residence
Married couple earned income AGI $ 300,000
Gain on sale of primary residence $525,000
Taxable gain ($525,000 - $500,000 cap) 25,000
New AGI ($300,000 + $25,000) $ 325,000
Excess over $250,000 cap for married filing jointly
($325,000 New AGI - $250,000 cap) 75,000
Tax of .038 of lesser AGI excess or taxable gain
($25,000 x .038) 950
Possible .009 tax of earned income ($75,000 x .009) 675
Tax for single man, with earned and rental income
Earned income AGI $ 85,000
Gross rents 130,000
Minus rental expenses 110,000
Net rental investment income 20,000
New AGI ($85,000 + $20,000) $ 105,000
Excess over $200,000 cap for single 0
Tax of .038 of AGI excess 0
Possible .009 tax on earned income over limit 0
Tax for single woman, with rental income from trade or business
Gross rents $ 750,000
Minus rental expenses 520,000
Net rents 230,000
AGI of net rental income $ 230,000
Excess over $200,000 cap for single 30,000
No tax of .038 because no unearned income 0
Possible tax of .009 on earned income over limit