The Medicare surtax kicks in next year and applies to certain types of interest, dividends, capital gains, and rents. This includes capital gains from property sales.
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Investors making more than $250,000 per couple or $200,000 individually will be subject to the tax.
Capital gains resulting from the sale of a primary residence totaling less than $500,000 per couple or $250,000 individually will continue to be excluded. Beyond those exclusions, however, investors may be subject to the tax.
A $530,000 capital gain on the sale of a primary residence would result in a taxable amount of $30,000. If joint income is more than $250,000, the surtax will apply to that $30,000 gain.
If their income is $290,000 ($40,000 over the income threshold), the surtax will apply to the lower amount of $30,000 made on the sale of the house. Realized gains of $550,000, means the surtax would apply to the $40,000 worth of income above the threshold instead of the $50,000 taxable gain.
A vacation home sale yielding a $60,000 capital gain would fall outside of the primary residence exclusion. If the couple’s joint income is $225,000, the $60,000 gain would be added to make that $285,000.
The rules are even more complex if the vacation home is a rental. The IRS still has a lot of guidance to give on application of the surtax, especially on capital gains on property sales.
It’s a good opportunity to develop a relationship with a trusted tax advisor to work with your clients who may be selling property after the first of the year. Or you may wish to encourage them to sell the property before year end.