Most Boston Second Homes Will Escape New Tax

Owners of most Boston second homes will not be affected by the new 3.8 percent tax on some investment income that will take effect in January 2013. The new tax will hit those taxpayers with adjusted gross incomes over $200,000 a year ($250,000 for married couples filing jointly).

Adjusted gross income is the number at the bottom of the front page of Form 1040. It includes dividends, interest capital gains, wages and retirement income, plus results from partnerships and small businesses. It does not include itemized deductions such as mortgage interest and charitable gifts or personal exemptions.

Most second homes will escape new taxThe new tax was passed by Congress in 2010 with the intent of generating an estimated $210 billion to help fund President Obama’s health care and Medicare plans. It was recently upheld in a controversial ruling by the Supreme Court.

Boston second homes that are not rented out and used only as a second residence have always been subject to capital gains tax on any gain. Also, gain is a net number. It is not simply the difference between the original purchase price and the eventual sales price. Homeowners can subtract real estate commissions, excise tax, and capital improvements before arriving at a net figure for capital gains purposes. If the home is not rented out and thus not an “investment property,” it is ineligible for a tax-deferred exchange.

A person’s primary residence still retains its favored status — even for those who have high incomes. The new “Medicare” tax still won’t apply to the first $250,000 on profits from the sale of a personal residence — or to the first $500,000 in the case of a married couple selling their home. The entire exemption on the sale of a primary residence remains intact and can be claimed every two years.

Unless you have significant income ($200,000, or $250,000 for married couples filing jointly), you, along with 97 percent of the U.S. population, will pay no additional tax on a Boston second home in 2013.

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