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Avoiding new Medicare tax on home sale

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in Small Business Tax

Q. I’m planning to sell my home in the next few years. Will the new Medicare tax apply to a home sale gain? K.W., Ronkonkoma, N.Y.

A. It might. The 3.8% Medicare tax, which takes effect in 2013, can hit only the portion of the gain that doesn’t qualify for the home sale gain exclusion. The exclusion is $500,000 for qualified homeowners who file jointly ($250,000 for single filers). However, any gain in excess of the excluded amount is treated as a capital gain, which could be subject to the 3.8% tax on the lesser of: (1) “net investment income” (including capital gains) or (2) the amount of modified adjusted gross income (MAGI) in excess of $250,000 for joint filers ($200,000 for single filers).

Bottom line: The 3.8% Medicare tax can potentially hit part of a home sale gain for sales in 2013 and beyond, but only a relatively small percentage of sellers will fall victim.

Tip: Because vacation homes are ineligible for the home sale gain exclusion privilege, gains from selling vacation properties in 2013 and beyond are more likely to get hit with the 3.8% Medicare tax.

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