Transfer tax that never was

Misinformation abounds about the 3.8% Medicare surtax, part of the Affordable Care Act. It does impose a tax on, among other things, some capital gains you get from selling your home. But it applies to very few people. For instance, to be affected, you must have an adjusted gross income that is either:

  • $250,000, in the case of a joint return or surviving spouse
  • $125,000, in the case of a married individual filing a separate return
  • $200,000, in any other case (i.e., individual or head of household)
  • AND you have to make a substantial profit from a home sale of more than $500,000 (joint return) or $250,000 (single return).

So, the vast majority of home owners will never notice this tax because most gains are well below those thresholds. The tax isn’t a transfer tax and the amount paid will depend on a formula.

Items that may be going …

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation gave you a tax break if you did a short sale or otherwise had mortgage debt forgiven.

Briefly, a short sale means you don’t have to pay back some portion of your mortgage. So if you’re forgiven $50,000 of your loan, for example, the IRS would ordinarily consider that $50,000 as taxable income. The expiring relief provision allows you to disregard that $50,000 for income tax purposes. The provision is set to expire on Dec. 31, 2012.

The 15% capital gains tax expires Dec. 31, 2012, and could go up to 20% (again, depending on the deal Congress cuts). That means if you sell your house next year rather than this year, you pay 5 percentage points more. But the floor for this tax remains high: As noted above, cap gains for a home don’t kick in until $250,000 in profit — double that for a couple.

Medically-necessary home improvements aren’t disappearing entirely, but the deal won’t be as good in 2013 as it was in 2012. Until the end of this year, anything you spent on these improvements above 7.5% of your AGI was deductible. But starting in 2013, you have to spend 10% of your AGI before claiming deductions. (However, if you’re 65 or older in 2013, the old rate of 7.5% still applies.)

… And items that are gone

Other tax changes that affect a wide range of home owners, however, have disappeared. When you file your 2012 income tax return, you won’t be able to deduct private mortgage insurance (PMI) premiums. Those ended in 2011. So if you have a chance to cancel PMI, you should.

At the same time, some energy-efficiency tax credits also disappeared; you can’t declare them when filing your 2012 taxes. These include energy-efficient windows and doors; certain kinds of hot water heaters; eligible HVAC systems; and specific types of roofs. None of these credits are available for changes made in 2012.

There are still some tax credits available — through 2016 — for big ticket energy-efficient systems like geothermal heat pumps, wind turbines, and solar panels.

Business as usual

The first-time home buyer tax credit ended a few years ago, but one thing that hasn’t changed: paying it back (if you took the credit after April 8, 2008, and before Jan. 1, 2009). You owe the government 1/15th of the credit each year over the next 15 years. If you took the $7,500 maximum, that’s $500 a year.

The home office deduction also remains, and although the rules haven’t changed, continued high unemployment may mean more people are taking advantage of it. If you’re new to the deduction this year, keep in mind that the rules are subtle and IRS oversight can be extensive.

Don’t forget the states

Does your state offer a home-related tax deferral? For example, the New York State Department of Taxation and Finance has a number of Hurricane Sandy tax relief items relating to both delayed filings and special tax provisions. Check with your local state tax department.
 
Do a replay

If a provision has expired, or is about to expire, there’s no way to request a do-over. However, if you forgot to claim a tax break that you were eligible for no more than 2 to 3 years ago, you can submit a revised 1040. File Form 1040X.
 
Now that the election is over, the president and Congress will negotiate changes for 2013. It’s safe to say that in the coming weeks, anything is on the table. Some of the disappearing tax breaks may be reinstated, at least in some form; some changes may come retroactively after Jan. 1, 2013.

Buckle up. We’ll be tracking the tax issues here at HouseLogic.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax pro for such advice.