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A subject that is frequently
discussed in real estate, but often misunderstood, is the Taxpayer
Relief Act of 1997. Tax and relief are so rarely used together, but in
this case it's true and most home sellers can benefit from it. What this
act refers to specifically is the exclusion of capital gains on the sale
of a principal residence, which more simply can be understood as the tax
benefit associated with selling a home. In 1997 legislation was passed that
fundamentally changed the treatment of gain on the sale of a residence.
The Act replaced a previous provision that benefited few and frustrated
many. In its place amended Code Sec. 121 was created, stating that an
individual may exclude from income up to $250,000 of gain realized on
the sale or exchange of a residence. The exclusion increases to $500,000
for joint filers. In general terms what this means is
that if you and your spouse purchased a home for $100,000 and sold it
ten years later for $600,000, you would be exempt from capital gains
because the gain does not exceed the established $500,000 limit. A
common misconception is that in order to avoid paying capital gains you
must rollover the gain into another, more expensive residence. This
simply isn't true. One of the primary benefits of the Act of 1997 is
that it allows homeowners to choose the type of housing they want
without worrying about the tax consequences. It is also designed so that
house sellers can take advantage of the tax benefit once every two
years, unlike the onetime exclusion of the previous Act. With all these benefits are some
strict guidelines that must be followed.
For example, in order to qualify for exclusion you must have
owned and occupied the residence for a minimum of two of the last five
years from the date of sale. In other words, if you sold your home on
September 26, 2000, the law states that you are required to have lived
in that residence for two years (not consecutively) between September
26, 1995 and September 26, 2000 to qualify. For obvious reasons,
properties intended solely for renting are exempt from this particular
tax benefit, however often times rentals and vacation homes can qualify
if they have served as a primary residence for the home owner during the
five year allotment. Something else to keep in mind is
that any gains you incur above the $250,000 and $500,000 limits will be
taxed at the 20% capital gains rate, however beginning in 2001 home
owners who occupy their homes for more than five years may qualify for
an even lower capital gains rate of 18%. The whole point of the Taxpayer Relief Act of 1997 was to streamline the system, giving homeowners greater flexibility without having to make home buying/selling decisions based primarily on tax considerations. What I have outlined here are the general terms of the 1997 federal tax bill, for further information consult a tax advisor or your local real estate office. |
