Residential Real EstateCapital Gains Tax Relief Is A Capital Idea
When Uncle Sam gave home owners a big tax break when they sell their homes
for a profit, he left a few fuzzy areas in the law.
Those gray areas are clearer now -- just in time for figuring your 1998
taxes.
Signed Aug. 5, 1997, the Tax Payer Relief Act of 1997
says if you sold your principal residence on or after May 7, 1997, the first
$500,000 (for joint filers, $250,000 for singles and couples filing separate
returns) of gain is excluded from capital gains tax.
The home must have been your primary residence for at least 2 of the 5
years before the date of sale. The relief act also says you can use the new
$500,000 exclusion once every two years. If you signed a contract to sell
your home between May 7 and August 5, 1997, you can choose the old law"s option
of deferring the gain to the new property, the old law"s age-55-or-over,
one-time-$125,000-exclusion option, or the new law"s exclusion.
Capital gains tax relief clarified
The tax relief act"s confusing prorate provision allowed you to prorate the
$500,000/ $250,000 exclusion if unforeseen events, such as a job change,
illness, or some other hardship forced you to sell before you met the two-year
time requirement.
But prorate what? The gain or the exclusion amount? The law wasn"t clear.
This summer, along with overhauling the Internal Revenue Service, the Internal Revenue Service
Restructuring and Reform Act gave the nod to the exclusion amount.
Say you are transferred to Boston after owning a home for just one year.
You can keep half of the exclusion amount ($125,000 if you"re single, $250,000
if you"re married) because you met half the requirement to occupy your home for
two years before you sell.
For example, if you and your wife bought a home in California"s fast
appreciating market 18 months ago, but now you"re being transferred to
Washington, D.C. and your gain on a luxury estate is $200,000.
Multiply three-fourths (18 months divided by 24 months) times the $500,000
statutory ceiling, and your maximum allowable tax-free exclusion comes to
$375,000. You pay no federal taxes on the gain.
Still more clarification
Unfortunately neither the relief act nor the reform act helped taxpayers
decipher a key ""effective date"" provision buried in the fine print.
The provisions could be especially helpful to people who want to sell their
home tax-free, but don"t qualify for the full exemption under the strict
two-year minimum ownership rules on capital gains.
Tax experts say anyone who owned his or her home as of Aug. 5, 1997 can
sell it and reap the full tax-saving benefits of the law without meeting the
employment, health, or other, ""unforeseen circumstances"" test.
However, they must meet the ""principal residence and use"" requirement,
and they must close before Aug. 6, 1999.
It"s under Section 312(d)(3) of the 1997 act and it"s designed to give
homeowners two years to adjust to the new system of taxes on home sale profits.
Home safe home
Finally, the reform act offers additional relief -- related to taxes you
don"t pay. It prevents the IRS from seizing your home (and any other
non-investment property you own that someone is using as a home) to obtain back
taxes when the amount you owe, including penalties and interest, is $5,000 or
less.
No matter how much you owe in back taxes, the IRS must exhaust all other
administrative remedies and alternative payment options before it seizes your
home sweet home.
Professional assistance
American Institute of Certified Public
Accountants, 1211 Avenue of the Americas, New York, N.Y. 10036-8775; (212)
596-6200; fax, (212) 596-6213.
National Association of Enrolled Agents,
200 Orchard Ridge Drive, Suite 302, Gaithersburg, Md. 20878, (301) 212-9608;
fax (301) 990-1611; e-mail naea1@cais.com.