By Dian Hymer
The Taxpayer Relief act of 1997 drastically changed the tax laws concerning capital gains on personal residences. Previously, taxpayers who sold their primary residence could defer tax on their gain if they bought another home within 2 years of selling. But the price of the new home had to be at least equal to the price of the home that was sold.
Under the new law, you don't have to buy another home to receive capital gains tax relief. And you only pay tax on gain you realize over $250,000, for a single individual and $500,000, for a married couple.
For example, let's say that you and your wife bought your current home for $300,000 in January, 1997. You sold it for $450,000 in March, 1999. Your $150,000 gain is significantly less than $500,000, so you won't be taxed on the gain.
To qualify for this gain exclusion, the seller must have occupied the property for two of the five years before the sale. There is no limit on how many times you can take the exclusion, but is can only be taken once every two years.
Suppose your employer transfers you to a different state a year and one-half after you buy your home. Will you be disqualified from taking the capital gain exclusion because of your relatively short period of ownership?
Seller Tip: The 1997 tax law didn't clearly spell out how much capital gains tax homeowners owed if they sold before the required two years. A law passed last year clarified the issue. To calculate how much tax you'd owe on your gain, multiply the exclusion amount you'd be entitled to if you owned for two years ($250,000 for singles or $500,000, if married and filing jointly) by your residency period expressed as a fraction of two years.
Let's say you bought a home in San Francisco for $350,000 on June 30, 1997. Your employer transfers you to New York City 18 months later, so you sell your home. You close on the sale on December 30, 1998 and realize a profit of $150,000. You're single so you'd be entitled to a capital gain exclusion of $250,000 if you had resided at the property for two years. You've resided at the property for 3/4 or 75 percent of the statutory time period. To arrive at this fraction, divide 18 months by 24 months (or 1.5 years by 2 years). Seventy-five percent of $250,000 is $187,500. So you will have no capital gain liability on this sale because your $150,000 profit is less than $187,500.
The new tax law is expected to help most home sellers. However, homeowners that have benefited from decades of home price appreciation might have done better under the old tax law. For example, suppose you bought your current home for $100,000 twenty-five years ago. It's worth $750,000 today. If you're single, you'll owe capital gains tax on $400,000 ($650,000 of gain less the $250,000 exclusion). Under the old law you could have deferred the entire gain if you bought another home within 2 years for $750,000 or more.
The new tax law reduced the maximum capital gains rate from 28 to 20 percent. If you acquire a primary residence after December 31, 2000 and hold it for a minimum of five years before selling, the top capital gains rate will be 18 percent.
The Closing: Lower capital gains rates apply to taxpayers in the 15 percent tax bracket.
. Questions of a Do It Yourself nature should be submitted to our "