Starting in 2013, a new 3.8% federal tax, known as the “Medicare Tax,” may apply to some gains on the sale of real estate, including even sales of personal residences. However, this is not a general tax and there are some exceptions. It is best to know the rules and seek competent tax advice.

The tax is calculated upon the lesser of:

1.  Net investment income; or

2.  The amount modified adjusted gross income exceeds: $250,000 for married couples filing a joint return or surviving spouses, or $125,000 for a married individuals filing a separate returns. The excluded amount is $200,000 for all other taxpayers.

Married couples filing jointly may still exclude up to $500,000 and singles up to $250,000 of the gain on the sale of a personal residence, thereby avoiding the tax. Consequently, persons selling homes may be subject to the new tax if their gain: 1. exceeds the exempt amount ($250,000 for individuals, $500,000 for married couples) and 2. causes taxable income to increase above the $125,000/$250,000/$200,000 limit.

While I’m focusing on the sale of real estate in this short article, I want to point out that this tax applies to all investment income, including dividends and interest, as well as gains on the sales of many other things, including the sale of a business.

If you find yourself in such a situation, be sure to confer with your tax advisor.