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: Not unless you’re quite wealthy. If your income is under $250,000 for married couples filing jointly, or $200,000 for individual filers, you are not subject to the ACA’s Net Investment Income Tax (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 7% 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.
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.
The Build Back Better Act, under consideration by Congress in late 2021, would close this loophole, albeit at a higher income threshold. It calls for the 3.8% Net Investment Income Tax to apply to profit distributions from partnerships and S-Corps, but only if the person’s income exceeds $400,000 ($500,000 for a married couple).
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.
your last sentence has a missing word – ‘many people are NOT on the hook for the medicare real estate tax”
Thank you! It’s fixed now.
Wealthy is not $250,000 for a married couple. Wake up it is 2021 not 1960.
The median household income in the US in 2020 was under $68,000: https://www.census.gov/library/publications/2021/demo/p60-273.html So a household income of $250,000 is 3.7 times higher than the median.
Even in San Francisco, a household income of $250,000 is more than double the median income: https://www.census.gov/quickfacts/sanfranciscocitycalifornia
So yes, $250,000 in household income is wealthy, any way you look at it.
And keep in mind that if a couple earning $250k+ sells their home and the profit is $400,000, this tax would not apply.
If that were the only condition, I would be happy. If you own an investment property that you have $50K in profits and you make less than 250K, you will still need to pay the extortion fee. I don’t think it is right to penalize those trying to make smart choices and not spend my income frivolously.
You’ll still pay regular capital gain taxes, yes. But not the NIIT. It’s only applicable if your income is over $250k.
=And keep in mind that if a couple earning $250k+ sells their home and the profit is $400,000, this tax would not apply.=
NOT TRUE! If it is an investment property or second home.
I guess it depends on your age. If you have worked and saved for a lifetime and are older it is not wealthy. Obviously you seem to think that anyone who makes much more than YOU do is wealthy. Also note that this tax is not double for married people and has NEVER, and purposely, not been indexed for inflation And if you think that $250,000 is wealthy that I don’t know what you think about Chelsea Clinton being worth $16,000,000. WAKE UP and stop your resentment.
I stand by my statement, and it’s backed up by the data regarding median household incomes. The article does clearly state that the exemption for the first $250k in profits is only applicable for a home sale if it’s the primary residence.
Income is not the same thing as net worth. When people have been saving for a lifetime, their net worth is likely to be a lot higher than a person who is just starting out. But if their *income* exceeds $250,000, they’re in the top 7% of all households in the U.S. That’s wealthy, any way you look at it.
I don’t consider myself wealthy and I have had to pay this extortion fee already. I don’t make near $250K but you get taxed on investment properties regardless of your income. It was a house I purchased for my late wife’s grand parents and when they both passed, I sold the property, the thanks I get is a swift kick in the pants from this act. I started with nothing and have done decently for myself by sacrificing and what do I get for it? increased health costs, worse coverage and paying ~4% when selling one of my investments.
The NIIT isn’t the same thing as regular capital gains taxes, which were already applicable long before the ACA. If your household income is under $250,000, you’re not subject to the NIIT.