Under the new 1997 tax law,
homeowners can escape up to $500,000 of capital gains taxes (if married
filing jointly..$250,000 if single or filing separately) when they sell
their principal residence. For example, the home was purchased far
$100,000 and is now selling for $6OO,000 In this case, there is no
capital gain. If the home sold for $625,000, there would be $25,000 of
Creative tax accountants and attorneys are already
spotting ways to make this work to the benefit of those who own more
than one home. If a person owned a second home, and had not depreciated
its value in prior tax years they could move to that second home and
live there for two years Then, when they sold the second home, they
could escape capital gains on the second home (The IRS rules state that
the home must be your principal residence for two years cut of the
preceding five years.) Do not attempt to “fool” the IRS however. They
will want to see your voting registration, vehicle registration and
drivcr’s license to verify that you have actually lived there for two
If you have rented out that second home or treatcd
it as an investment property, the process and calculations may bccome
much more complex. The method stated above could still save you money on
the capital gains taxes, but a tax accountant or attorney should be
consulted to ensure that you follow the rules 10 maximize your savings
and that your calculations are correct.
There is no limit to the number of times someone
may lake advantage of this tax break, and there is no age requirement,
as there was in the past.
Will the tax bill, signed by the President on August 5, 1997 impact the real estate industry?
Yes! The bill makes significant changes
that will benefit real estate, including capital gains tax exclusions on
the sale of a principal residence, a reduction in overall capital gains
rates, penalty–free withdrawals from existing and new IRA far the
purchase of a horne by a first time buyer increased deductions for
health insurance premiums for the self employed, clarifications of the
home office deduction requirements and reduced estate taxes.
If I sell my home how will I be impacted?
The new tax bill grants married couples
up to ~ S500,000 capital gains tax exdusion for the sale or a principal
residence in which the owner has resided two of the last five years.
Singles enjoy a $250,000 exclusion. Any profits in excess of the caps
will be taxed at the new lower capital gains tax rate. Best of all, this
principal residence exclusion can be reused over and over again.
Can I still “roll over” the proceeds from a home sale if I purchased a home of greater or equal value?
No. The “roll over” provision in current
law which allowed an individual to avoid capital gains taxes by
purchasing a home of equal or greater value has been repealed in favor
of the exclusion.
What if I am over 55 years of age end I already used my one-time exclusion of $125,00O? Can I take advantage of the new law?
Yes. Although the $I25,000 exclusion for
individuals over the age of 55 has been repealed. The new law allows any
couple. regardless or age, to exclude from taxes up to $500,O00 in
capital gains (or $250,000 for singles) every two years for an unlimited
number of transactions involving their principal residence.
I sold my home before the President signed the bill. Do I still qualify for a capital gains tax exclusion?
Maybe. Sellers and buyers who have signed
a “binding contract” between May 7, 1997 and the day. President Clinton
signed the bill (August 5) and authorized it¹s use to either the
existing rollover law or take advantage of the new tax provisions.
Individuals who signed a contract prior to May 6, 1997 would be hound by
the tax laws in effect at that time. For home sales after the August 5
date. the new tax laws are applicable. although some individuals who are
in the midst of a two year rollover period, following an earlier sale,
may be able to take advantage of the new exclusion.
Are losses on the sale of a resIdence deductible?
No. Taxpayers still cannot deduct losses on the sale of their residences.
What are the new capital gains rates?
Capital gains rates are based on an
individual’s taxable income. Under the new law capital gains rates are
lowered from the previous rate of 28% to 20% for those in upper income
brackets and from 15% to 10% for those in lower tax brackets for assets
sold after May 6, 1997. Overall capital gains rates will be lowered even
further in 2001, to 18% and 8% respectively, for assets purchased after
December 31, 2000 and held live years or more. No indexing of capital
gains was included.
Has the holding period for assets to qualify for capital gains tax treatment changed?
Yes. Effective July 29,1997 assets must
be held at least 18 months to qualify for capital gains treatment.
Previously assets held 12 months were eligible for capital gains
Is investment property taxed differently than other assets under the new bill?
The new budget plan specifies that at the
time of sale of an investment property, any gains due to appreciation
will he taxed at a reduced 20% rate and gains due to “depreciation
recapture” will be taxed at 25%.
Have the rules governing 1031 “like kind” exchanges changed?
No. Despite reports that these rules might have been significantly changed, no provisions were included in the bill.
Can I wlthdraw money from my Individual Retirement Accounts (IRAs) for the purchase of a home?
The tax bill allows penalty-free
withdrawals by grandparents. parents, children, spouses or principals of
up to $10,000 from existing and newly created “American Dream” [RAs for
the down payment and closing costs of purchasing a first-time home,
after December 31, 1997.
I’m a self-employed (REALTOR), are there any special benefits in the new tax bill for me?
Yes, The new tax package allows 100%
deductibility of health insurance premiums by 2007 by self-employed real
estate professionals. Further, the definition of “principal place or
business” for home-office deductions has been modified to include a
place of business which is used by the tax payer for business-related
administrative or management activilies if there is no other fixed
location of business where the taxpayer conducts substantial
adminstrative or management activities.
PHONE: (316) 271-2229 ext. 138
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