Several people have asked me about a new 3.8% tax on home sales. For almost everyone, this doesn't apply. Here are the facts:

What Is the Medicare Tax?

You already pay 2.9% for Medicare on your salary (split between you and your employer). Starting January 1, 2013, Medicare tax expanded to include unearned income—interest, dividends, capital gains, and most rental income—at a 3.8% rate.

Who Does This Affect?

• $200,000 Adjusted Gross Income (AGI) for single filers

• $250,000 AGI for married filing jointly

The tax applies to the lesser of: (1) the amount of income over the threshold, or (2) total unearned income.

AGI is your total income minus specific adjustments (e.g., deductible IRA, alimony paid, self-employed health insurance).

Does This Apply to Your Home Sale?

For the 3.8% Medicare tax to apply, both must be true:

• Your AGI exceeds the $200,000/$250,000 threshold; and

• Your gain exceeds the home sale exclusion ($250,000 single / $500,000 married filing jointly).

If your home sale profit isn’t taxed under regular rules, it’s also not subject to the Medicare surcharge.

Other Important Points

• Most rentals show tax losses, so rental activity usually won’t trigger the surcharge.

• Harvest losses: If selling investments at a gain, consider selling losers to offset—surcharge applies only with a net gain.

Ways to Avoid or Reduce the Surcharge

• Installment sales: Spread real estate profit over years to keep AGI below thresholds.

• 1031 exchanges: Swap investment real estate instead of selling for a large realized gain.

• Municipal bonds: Consider shifting taxable interest to tax-free muni bonds.

Get Professional Help

Before major financial decisions, consult your tax professional—other tax rules may be more important than the Medicare surcharge in your situation.