Will the New 3.8% Tax Affect Me When I Sell My Hawaii House?

There has been some myths and few facts floating around about this new tax that takes effect in 2013. I have received those chain emails sent to me stating that everyone will have to pay this tax if you sell a property. This is far from the truth. It is called the Net Investment tax or the 3.8% tax. Many people are worried that if they sell a property, any property, they will need to pay 3.8% on the total sale price.

Who is Affected by the New 3.8 Tax?

This tax is on investment income, not wages and salaries. For starters this will impact someone who had “net” investment income. Net is after expenses and after the “base” of the asset. The base, for example, would be the amount you paid for your property. So what potentially could be the taxable portion would be the gain, gains you made over the purchase price, and after you subtract expenses.  

So if you purchased a home for $100,000 and sold it for $215,000 and had $15,000 in expenses, basically you may have to pay the 3.8% on $100,000. But wait, you only would owe that extra tax if you were over the “threshold” and had over $200,000 (single) $250,000 (married) of income.

That $100,000 you would not owe any tax on if you had less than $100,000 in wages, keeping your threshold under the $200,000. But if you had $200,000 in wages and the $100,000 gain on your house, yes you will pay $3,800 in the additional tax on the $100,000 of net income.

3.8 Tax Example

Here is an example from the WSJ: 

“A widow has $210,000 of adjusted gross income from pensions and IRA withdrawals, so she doesn’t owe the new tax even though that income is above $200,000. But if instead she has $120,000 from pensions and IRA payouts, plus a $100,000 net taxable gain from the sale of her home — after subtracting her cost basis and the $250,000 exclusion — then she will owe $760 of new tax on $20,000.”

“For people under the thresholds, the timing of investment income will become very important,” notes Sharon Kreider, a CPA in Sunnyvale, Calif., who has studied the new levy.

Things can get more complex, but these basics should help to simplify the facts.