Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

November 9, 2012

Q: I have received emails saying that if you sell your home in 2013, you must pay a 3.8% Medicare tax on the sale.  This greatly concerns me because I will be putting my home on the market next year.  Do you know anything about this?  Is it true or just another urban legend?  Thank you for your help. 

Charlotte
Loomis, CA

A. There is a great deal of misunderstanding regarding the new Medicare tax on unearned income with respect to the sale of a principal residence. 
Here's how it works: The new 3.8% Medicare tax becomes effective for 2013.  It applies to the lesser of "net investment income" or the excess of your "modified adjusted gross income" over certain threshold amounts.  The threshold amounts are $250,000 for married taxpayers filing a joint return, $200,000 for single and heads of household, and $125,000 for married taxpayers filing separate returns. 

Capital gain income is included in "net investment income."  Gain from the sale of your principal residence may create capital gain income, but only to the extent that it exceeds the "section 121" exclusion.  If you used the property that you sell in 2013 as your principal residence for at least 3 of the last 5 years, and you haven't claimed the exclusion on the sale of any other residence in the last two years, you may be able to claim the exclusion.  The exclusion is the lesser of the gain from the sale of the residence or $500,000 if you are filing a joint return, $250,000 if you are filing single or head of household. 

In order for the gain from the sale of your principal residence to be subject to the new 3.8% Medicare tax it will have to exceed the $500,000/$250,000 section 121 exclusion, and your modified adjusted gross income, including the taxable portion of the gain, will have to exceed the applicable threshold amount mentioned above. 

Unless the gain from the sale of your principal residence is very large, or you don't qualify for the section 121 exclusion, and your modified adjusted gross income is over the applicable threshold amount, the gain from the sale of your principal residence probably won't be subject to the 3.8% medicare tax. 

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Meet Our Financial Experts

Claudia Buck is The Sacramento Bee's personal finance columnist.  Read all her columns here.  Contact her at cbuck@sacbee.com

Terri Carpenter offers advice on job hunting, retraining and career counseling.  Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA).  With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change.  Ask her a question. 

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento.  The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation.  She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section.  Ask her a question. 

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville.  With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees."  Ask her a question. 

Gregory Burke, a CPA and tax expert with John Waddell & Co. inÂ Sacramento since 1984, worked as an IRS tax auditor for six years.  Heâ€™s aÂ past chairman of the California Society of CPAs.  Ask him a question. 

Daniel Tahara takes your questions about California taxes.  Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor.  Ask him a question.