|How home sellers benefit under the
new tax law|
Julie Garton-Good, GRI, DREI
The good news regarding the new tax law is
that home sellers may be less likely to pay taxes when selling a primary
residence at a profit. The bad news is that, as with all laws, there are
exceptions. The sale date will have some bearing on the options available to
The new law allows a couple to exclude up to
$500,000 in capital gains when they sell a house or apartment that has been the
primary residence of at least one spouse during two of the last five years. A
single person gets one-half of that, or a $250,000 exclusion.
These guidelines replaced the old $125,000
exclusion previously available only when one of the spouses was 55 or older. In
addition, it replaces the old law allowing the homeowner to delay paying taxes
on profits if within two years before or after the sale, he/she bought a
replacement home that was at least as expensive as the one being sold.
What if you sell your primary residence
before living in it for two years? To get any break on profits, you must prove
that the move was due to a new job, health reasons or other "unforeseen
circumstances" that will be clearly specified in upcoming regulations. But
if you can prove that you fit one or more of those criteria, you will get a pro
rata exclusion for paying taxes on your profit. For example, if you lived in the
house for only one year (50 percent of the required two-year time), you could
receive one-half of the $500,000, or a $250,000 exclusion.
Potential losers under the new tax law will
be home sellers who have profits in excess of the $250,000 (for singles) or
$500,000 (for married) amounts. In those cases, taxes will be due at a 20
percent rate on the profits that exceed the exemption, regardless of whether a
new home is purchased.
Is there any way to whittle down your
profits when it comes time to pay Uncle Sam for gain on the sale? You bet. You
can exclude from the profits any expenses for capital improvements you've made
to the home. For example, the $20,000 you spent adding on a bedroom could come
off the top of your profits. As in the past, keeping accurate records of all
improvements and their costs will be vital to prove your claim.
Now for the dates and time frames for the
new law. If you sold your home before May 7, 1997, you must use the old tax law.
If you sold it between May 7 and July 28 (even entering into a binding sales
agreement during that time counts) you can choose which of the two laws--old or
new--you prefer to use. For example, if you have large gains, you might want to
roll them over into another house and defer taxes on the profit as permitted
under the old law.
As you can see, as a home seller, you stand
to reap some benefits under the new tax law. But it's also apparent that a quick
consultation with your CPA or tax advisor should be a required first stop, even
before planting that "for sale" sign in your front yard.