New 3.8% Tax on Sale of Personal Residence?


Question: I have a question about selling my home in 2013 (should I get so lucky!). I do not understand the new 3.8% tax (as part of the Affordable Care Act) on home sales. I am a widow; my annual income is far less than 100,000; I will not realize more than $250,000 over and above what I originally paid for the home. However, I do have a revocable living trust and the home is included in that trust. Can you tell me how the new tax will affect me at closing? W.B.
Answer: First, let me explain something for our readers. A revocable living trust is an estate planning strategy whereby you establish a trust during your lifetime; retitle most or all of your assets into the name of the trust; typically for the purpose of avoiding probate at death and to assure information about your assets remains private. During your lifetime, you retain the ability to change the provisions of the trust or to dissolve the trust. In this case, I am going to assume that even though you have placed your home in your revocable trust, that you have retained your homestead exemption indicating that it is your personal residence. When you sell a personal residence, the first $250,000 of gain is excluded from taxes ($500,000 of gain is excluded for married couples). Since you anticipate that your gains will not exceed $250,000, I would not expect you to owe taxes when you sell. 
However, the potential for this 3.8% Obamacare surtax is real and allow me to change the facts a bit to show you an example. Let’s assume a married couple sells their home today for $800,000 that they paid $200,000 for years ago. They have a $600,000 profit but are allowed to apply a primary residence exclusion of $500,000 leaving a taxable gain of $100,000. “Obamacare imposes the 3.8% surtax on the lesser of (1) net investment income, or (2) the individual’s modified adjusted gross income over $250,000 ($200,000 for single filers)”, says John West, a CPA and partner at Sellers, Richardson, Holman & West, LLP. If this taxpayer had $220,000 of income before the home sale, the 3.8% surtax would be $2,660 ($220,000 + $100,000 = $320,000; $320,000 – $250,000 = $70,000. 3.8% tax on $70,000 of investment income that exceeds the $250,000 threshold = $2,660). This is in addition to the 15% capital gains tax on the $100,000 gain.
Question: About fourteen years ago, my husband and I purchased a long-term care insurance policy but dropped it after three to four years because the insurance company kept raising the premiums. We understood that we would not get back any of our money but that we could apply this to nursing home costs if and when we used those services. Would this still be true even though we haven’t paid on these policies for years but still receive brochures and information from the company? I.P.
Answer: While anything is possible, I think it is unlikely that you will receive any benefits from the money you paid into this policy. Typically when you cancel a policy as you’ve described there are no residual benefits. To be certain, I’d recommend that you contact the company and ask. If you have your policy number it will be helpful in getting a speedy answer.