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 you.

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.