A surtax created by the health-reform law will apply only to high-income individuals who sell their homes after 2012 for a large profit. By Kimberly Lankford, Contributing Editor July 12, 2010 I’ve heard that everyone who sells their house will now have to pay a 3.8% tax on the proceeds from the sale because of the new health-care law. Is this true?No, although it’s possible that an extra tax will fall on a limited amount of home-sale profit realized by some high-income individuals. Here’s the deal: Starting in 2013, the health-care-reform law adds a 3.8% Medicare surtax to unearned income -- including interest, dividends, capital gains (potentially including profits from the sale of a home), rents and royalties. This tax applies only to people with modified adjusted gross incomes of more than $200,000 if they’re single, or $250,000 if married filing jointly. The surtax applies to investment income or the amount of modified adjusted gross income above $250,000, whichever is less. Another rule will further protect home-sale profits from the tax. When you sell your home, up to $250,000 of the profit is tax-free if you’re single and have owned and lived in the home for at least two of the five years leading up to the sale. The tax-free amount is a cool half-million dollars if you’re married and file a joint return. Any profit that dodges an income-tax bill thanks to this rule avoids the new 3.8% tax, too. So a married couple who bought a home more than two years ago for $300,000 can sell it for up to $800,000 without having to pay taxes on the sale -- no matter how high their income is. (The exclusion does not apply to vacation homes.) Advertisement If they were to sell the home for $900,000 in 2013, however, the $100,000 profit above the tax-free amount would be hit by the 15% capital-gains tax and might be subject to the Medicare surtax, too. It would kick in if the couple’s income (including that $100,000 of taxable profit) exceeded $250,000. If the couple had a modified AGI of $260,000, for example, they’d have to pay the 3.8% tax on $10,000. With an income of $500,000, they’d owe the 3.8% tax on the full $100,000. If your income puts you in the crosshairs for this upcoming tax hike -- and you anticipate a home-sale profit that exceeds the tax-free amount -- selling before 2013 would let you avoid the tax, notes William Massey, senior tax analyst with Thomson Reuters. For more information, see Your Tax Bill for the Health Bill. For an explanation of which health-insurance benefits will be taxed -- and which will not -- see A Tax on Health Benefits. Got a question? Ask Kim at firstname.lastname@example.org.