Does the Gain on the Sale of a Personal Residence trigger the 3.8% Medicare Surtax?
It seems that the gain on the home sales have the potential to trigger the surtax under the following circumstances as discussed below;
1) If a taxpayer’s MAGI exceeds the $200,000/$250,000/$125,000 threshold, or,
2) If a taxpayer engages in the sale of a principal residence resulting in a capital gain greater than the IRC Section 121 exclusion ($250,000 for single taxpayers and $500,000 for married couples).
The following scenario's will illustrate how a potential gain on sale of a residence could trigger the "imposition 3.8% Medicare Surtax."
Assume, a married couple earns a combined salary of $140,000. They sell their principal residence in 2013 for $700,000 and net a gain of $600,000,000. Their MAGI in the year of the sale is $240,000 (salary plus $100,000 gain above $500,000 exclusion). Because their MAGI is less than the $250,000 threshold, they do not pay the 3.8 percent Medicare tax.
A married couple earns a combined salary of $1.5 million. They sell their principal residence in 2013 for $1.8 million and with a gain of $800,000. Their MAGI in the year of the sale is $1.8 million (salary plus $300,000 gain above $500,000 exclusion).
Since, the MAGI is more than the $250,000 threshold applicable to a joint filier, the taxpayers will have to pay the 3.8% Medicare tax. Their net investment income is $300,000 ($800,000 minus $500,000) and the excess of their MAGI over the threshold is $1.55 million ($1.8 million minus $250,000). Their Medicare Surtax is therefore 3.8% of $300,000 or $11,400.
It is worth noting that had the sale of the residence been completed in 2012, the surtax would not apply to the transaction due to the fact that the surtax would be effective in 2013.