Tuesday, October 5, 2010

Home sales and the 3.8% Medicare tax - it's real, sellers will pay it, be ready

There has been a lot of coverage in the media and throughout our industry about this 3.8% tax on home sales. There have been articles saying it's a lie, myth, false, etc. NAR Mythbusters called it false but if you read carefully, they in fact acknowledge it's REAL! However, the bar is set for markets with high-value homes and high income individuals. In Los Altos and Los Altos Hills we have a significant number of people who meet these criteria.

BARRIER 1: Personal Income (Adjusted Gross Income or AGI)
Your household needs to have income of $200,000 (individuals) or $250,000 (married couples). This barrier is easily passed in Silicon Valley with two engineers or managers each making $125K or more per person. This sort of household income may be rare in other parts of the country but here it's common.

BARRIER 2: Net Investment Income
You get an exemption of $250,000 (individuals) or $500,000 (married couples) from the sale of your personal residence. This covers most people in the country and even a fair number of people in Los Altos and Los Altos Hills. However, once you go past that THE TAX TAKES EFFECT. Keep in mind, you have to meet barrier 1 and 2 - BOTH.

This will impact residents of Los Altos and Los Altos Hills because a lot of people bought homes priced at $500,000 years ago and those homes easily sell for $1.5 million or more today. So, with $1 million in equity, you'll a break on the first $500,000 but you'll pay the 3.8% tax on the remaining 3.8%. Check with your tax advisor on the details. This tax takes effect January 1, 2013.

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