Does ObamaCare mean a 3.8% MedicareTax on Selling Your Home?

The Short Answer:
Not for most homeowners.

The Long Answer:
The new bill does provide for a 3.8% tax on capital gains, including real estate investments. Capital gains include investment income and not earned income. For example, your paycheck is earned income, the increase in the value of your stock is a capital gain. So if you buy your house for $400K in 2000, and sell it for $1 million in 2013 (wouldn't that be nice?), the $600K you make is a capital gain that can be taxed.

In tax terms, the $400K you spent on the house is your basis, and it gets subtracted from the sale price to determine your gain.

There is also an exclusion for the sale of a personal residence. The exclusion amount is $250K for single people and $500K for married couples. So for a married couple selling the above referenced house, the first $500K of gain would not be taxed. Their gain would only be counted as $100K, and their tax liability would be 3.8% of $100K, or $3,800.

This seems like a lot still, but there is another factor to consider. The price you pay for your home is not the only thing that affects your basis. Home improvements also count toward reducing your gain and hence your tax liability. Let's say that the married couple spend $30K on some new appliances and hardwood flooring. They can add that $30K to their basis of $400K (the amount they paid for the house). If their basis is $430K, when they sell the house for $1 million and exclude the first $500K of gain, their net gain is only $70K. 3.8% of $70K is $2,660.

The bottom line is that even if a taxpayer has a very large gain on his or her home, the new capital gains tax won't have that big of an effect.

Note: It does not matter that you paid for the house with a mortgage, the purchase price of the house is still your basis, because you made yourself liable for that amount on your mortgage.

Who will be affected by the tax?
Owners of commercial or rental property will not have the personal residence exclusion to buffer the effects of the tax, and single people will be hit harder by the new capital gains tax.

One further Note:
This 3.8% increase is on top of the regular capital gains tax, which increased from 15% to 20% in 2011. The 5% increase applies now. The 3.8% increase will take affect in 2013.