New Federal Tax on Investment Income


On January 1, 2013, a new 3.8% Federal tax on the investment income of individuals, estates, and trusts is scheduled to come into force.  The tax was enacted in 2010 as part of the Administration’s health care legislation, and there is of course some political uncertainty regarding whether Congress will amend or repeal it before it comes into effect.  For the time being, though, we need to be prepared for this new tax that will be imposed on interest, dividends, annuities, royalties, rents, capital gains, and certain other items.  The tax will be in addition to all otherwise applicable Federal, state, and local income, transfer, and other taxes.

This memorandum focuses on the tax’s application to owner-occupied residential property (including single-family homes, condominiums, and cooperative apartments).1   Although the tax is complicated, here are a few simple rules to guide you:

  • In general, if an individual’s home is sold, the 3.8% tax will be imposed on the gain “recognized” by the seller (and not on the gross purchase price).
  • As you are aware, a limited portion of an individual’s gain on the sale of a primary residence (generally, $250,000 for a single individual, and $500,000 on a joint return) may not be taxable for ordinary Federal income tax purposes.  The same rule applies for purposes of the new tax.
  •  If the seller’s “adjusted gross income” (with certain modifications) is below specified levels (generally, $200,000 for a single individual, or $250,000 on a joint return), the seller may be exempt from the new tax.

We hope that this general guidance is helpful to you.  However, each seller should consult with a qualified tax advisor to determine the application of the new tax, as well as the application of all other tax rules, to the seller’s particular circumstances. 

For more information on this Federal Tax,  see our post “The New 3.8% Real Estate Tax Is Coming” and the document explaining the new tax with examples.

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