The “Tax on Sale of Your Home” Email Myth

Image by Sean MacEntee via Flickr

If you have an email address (and let’s face it, who doesn’t?), you’ve likely received this email.  In case you haven’t received it, there’s an email that is being forwarded around the internet about a new tax on selling your home – I get at least one of these a month it seems. I’ve copied the text of one of the emails below. This article is to help you understand why the email is a misguided myth, partly grounded in truth but not applicable for most folks.

The email is usually forwarded at least a half-dozen times by the time you receive it, making it difficult to know where it started from.  In addition, the text of the email is often in large, bold, red font in places, such that you can almost feel the spittle coming off the page at you.

Here’s the email:

Will you ever sell your house?
Did you know that if you sell your house after 2012 you will pay a 3.8% FEDERAL sales tax on it?

That’s $3,800 on a $100,000 home etc.

When did this happen? It’s in the health care bill. Just thought you should know.

SALES TAX TO GO INTO EFFECT 2013 (Part of HC Bill)  Why 2013? Could it be to come to light AFTER the 2012 elections?

REAL ESTATE SALES TAX

So, this is “change you can believe in”?

Under the new health care bill – did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don’t kick in until 2013 If you sell your $400,000 home, the re will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Does this stuff make your November and 2012 vote more important?

Oh, you weren’t aware this was in the obamacare bill? Guess what, you aren’t alone. There are more than a few members of Congress that aren’t aware of it either

<web address deleted>

Why am I sending you this? The same reason I hope you forward this to every single person in your address book. VOTERS NEED TO KNOW. 

Okay, so here are the facts:

It is a fact that under the Patient Protection and Affordable Care Act of 2010 there is a new 3.8% surtax on unearned income for folks above certain income levels.  I wrote about this surtax in relation to Roth conversions last year, but I didn’t go into detail about this email myth – I hadn’t started receiving them with the frequency that I have lately.

So the kernel of truth in the email is that some home sales could be impacted by this new surtax.  The real truth though is that in the case of a home sale, if the taxpayer has lived in the home for 2 out of the previous 5 years, up to $250,000 of gain in the value of the home is exempt from taxation.  The exclusion of gain amount is doubled to $500,000 for a married couple filing jointly who both meet the “2 out of 5” test.

The other test that would have to be met in order for a home sale to be hit with the surtax is that you have Modified AGI in excess of $250,000 for married couples filing jointly, $125,000 for married couples filing separately, or $200,000 for single and head of household filers.  If you don’t have income above that level, the surtax would not apply to you at all.

In other words, the situation described by the email could come about if you had an income greater than the levels outlined above, and one of the two circumstances below is met for the home sale:

• You own a home that you and your spouse have lived in for at least 2 out of the previous 5 years and the home has appreciated more than $500,000 in value (or $250,000 for single filers); or
• You own a home that you have not lived in during the previous 5 years that has appreciated in value in any amount.
• Note: If you lived in your home less than 2 years out of the previous 5, the exemption is pro-rated.  For example, if you lived in the home only 1 year out of the previous 5, half of the exemption would be available.

I doubt if many folks will come anywhere near meeting those circumstances.  It’s not impossible, but I think far less possible than the email leads you to believe, and the surtax certainly does not apply to ALL real estate sales.

Don’t get me wrong, I don’t want extra taxes imposed in these circumstances, either.  I do think people should know about this tax, but I want them to understand the tax in the correct context.  If you’d like more information on this myth, see what Snopes has to say about it.

Feel free to forward this link to anyone and everyone on your email list, so that the corrected word gets out.  Voters do need to know.