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Capital Gain: Sale of a Principal Residence
John and Mary sold their principal residence and realized a gain of $525,000.
They have $325,000 Adjusted Gross Income (before adding taxable gain).
The tax applies as follows:
AGI Before Taxable Gain$325,000
Gain on Sale of Residence$525,000
Taxable Gain (Added to AGI) $25,000 ($525,000 – $500,000)
New AGI$350,000 ($325,000 + $25,000 taxable gain)
Excess of AGI over $250,000$100,000 ($350,000 – $250,000)
Lesser Amount (Taxable) $25,000 (Taxable gain)
Tax Due$950 ($25,000 x 0.038)
NOTE:
If John and Mary had a gain of less than $500,000 on the sale of their residence,
none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax
would depend on the other components of their $325,000 AGI.
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