Q. I’ve heard that funding Obamacare requires a huge tax on real estate transactions. Does that mean that when I sell my house I’m going to get stuck with a big tax bill to pay for everyone else’s healthcare?
A: In most circumstances, no. This is because the ACA’s Net Investment Income Tax (NIIT) only applies to those with fairly high incomes, and because a significant amount of real estate profit is excluded from capital gains. Here’s how it works:
If your income is under $250,000 for married couples filing jointly, or $200,000 for individual filers, you are not subject to the NIIT. Although those income thresholds are not indexed for inflation, they still exempt nearly all Americans from this tax, regardless of whether they sell a home. (A household income of $250,000 would put you in the top 8% of all households in the U.S.)
For people who do have incomes that exceed those amounts, the NIIT is 3.8% of capital gains (profit) on real estate transactions and other investment income such as interest, dividends, rental income, capital gains from stock sales, etc.
The first $250,000 (for an individual; $500,000 for married couples filing jointly) in profit on the sale of a primary residence is excluded from the tax. But if a vacation or investment property is sold, all profits are subject to the tax. Keep in mind, however, that profit is not the same thing as sale price. The tax only applies to profits from the sale.
The income threshold means that most people are exempt. And the further exemption for the first $250,000 ($500,000 for married couples) in profits means that even in the high-income demographic, most people are not on the hook for the Net Investment Income Tax if they sell their primary home.
Note that the ACA also imposed an Additional Medicare Tax of 0.9%. The standard Medicare tax rate is 1.45%, which is payroll deducted from wages that people earn. But for people who earn more than $200,000 (or $250,000 for married couples filing jointly), the Medicare tax increases to 2.35%. For self-employed people at that income level, the Medicare tax is 3.8%; the normal rate for self-employed people is 2.9%, but the Additional Medicare Tax adds another 0.9%.
Most very wealthy Americans earn the bulk of their income from investments rather than wages, which means that they’re subject to the Net Investment Income Tax. But there’s a loophole that exempts profit distributions for partnerships and S-Corps from being subject to the Net Investment Income Tax. And since they aren’t considered wages either, they’re also not subject to the Additional Medicare Tax.
Congress has considered closing this loophole, and this Congressional Budget Office analysis depicts how much additional revenue would be generated if they did so.
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.