Oakland County Bonus Tax Breaks When Selling Your Home

Taxpayers in Oakland County, Mi who sell their principal residence can pocket—tax-free—as much as $500,000 in profit if they file federal taxes jointly or $250,000 if they file singly. The property must have been owned and used as their principal residence for any two of the prior five years. Homeowners can shelter the profits on the sale of a home as often as once every two years. If the two-year use and ownership tests are not met, but the home is sold because of special circumstances (i.e., health problem, job loss, etc.), the exclusion is prorated. Otherwise, gains above $500,000 or $250,000 are taxed at current capital gains rates plus may be subject to an additional 3.8% surtax, depending on income.

Note: In effect since January 1, 2013, the Net Investment Income Tax (NIIT) applies a 3.8% surtax to certain types of net investment income of individuals, estates and trusts that have modified adjusted gross income (MAGI) exceeding certain thresholds. For individuals, the MAGI threshold for a single filer or a person filing as head of household (with qualifying person) is $200,000; for married filing jointly or for a qualifying widow(er) with dependent child, $250,000; for married filing separately, $125,000.

The 3.8% tax is applied to whichever amount is less—your net investment income or the amount your income exceeds the applicable income threshold. For example, if a couple’s net investment income is $200,000 while their MAGI is $300,000 ($50,000 above the applicable income threshold), the 3.8% tax would be applied to the $50,000 in excess of the MAGI threshold.

For Oakland County, Mi home sellers with MAGI above the applicable threshold, the 3.8% tax may be applied to your home-sale gains that exceed your home-sale gains after subtracting your gain exclusion ($500,000 for married joint filers, $250,000 for single filers). If your MAGI amount above the threshold is less than your home-sale gains after exclusion plus net income from certain other investments, you would only owe the 3.8% tax on the excessive MAGI amount, not the after-exclusion gains (NIIT applies to the lesser of extra income or extra gains). You can still take either $250,000 or $500,000 in profits from your home sale tax-free.

SMART TIP: Income from rental property, gains from the sale of a second home and gains from the sale of an investment property would be considered part of net investment income (and possibly subject to the NIIT) to the extent that gains are not otherwise offset by capital losses. Browse to http://bit.ly/IRSNIIT for further details.