Gains Tax Update for South Bay Home Sellers
are eleven of the most commonly asked question regarding the
new tax bill signed by
President Clinton on August 5, 1997.
the tax bill 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 IRAs for the purchase of a home by a first time buyer,
increased deductions for health insurance premiums for the
self employed, clarifications for the home office deduction
requirements and reduced estate taxes.
I sell my home how will I be impacted?
The new tax bill grants married couples up to a $500,000
capital gains tax exclusion for the sale of a principal
residence where 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
I still rollover the proceeds from a home sale
if I purchase a home of greater or equal value?
No. The rollover 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purchasing a home of equal or greater value has been repealed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 and I already used
my on-time exclusion of $125,000? Can I take advantage of
the new law?
Yes. Although the $125,000 exclusion for individuals over
the age of 55 has been repealed, the new
law allows any couple, regardless of age, to exclude from
taxes up to $500,000 in capital gains or $250,000 for singles
every two years for an unlimited number of transactions
involving their principal residence.
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) are authorized to use
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 bound by the tax laws in effect
at the 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
losses on the sale of a residence deductible?
No. Taxpayers still cannot deduct losses on the sale of
are the new capital gains rates? Capital
gains rates are based on 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 five
years or more. No indexing of capital gains were included.
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 treatment.
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
be taxed at a reduced 20% rate and gains due to depreciation
recapture will be taxed at 25%.
the rules governing 1031 like kind exchanges
No. Despite reports that these rules might have been significantly
changed, no provisions were included in the bill.
I withdraw 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
IRAs for the down payment and closing costs of purchasing
a first-time home, after December 31, 1997.
All of these matters are subject to interpretation.
Please consult your tax advisor.