Home Sale Capital Gains


Selling a home, moving to a new area and buying a business or company has become a lot easier, and maybe more profitable. With tax free profits, you can now buy that business you have been wanting to. Relocation makes more sense than ever before.

A big change has taken place, and many homeowners don't know about it yet. For most, the change is good news.

The Taxpayer Relief Act of 1997 was played up in the press for the debate over tax credits for children. But there's more. Now, when you sell your home, you get the first $500,000 tax-free on a joint return ($250,000 maximum for single filers).

This new rule took effect for sales after May 17, 1997. To qualify, you have to have used your home as your primary residence for at least two years out of the last five years. The tax-free profit can be used an unlimited number of times during your life, but no more often than once every two years.

Gone now is the tax deferral for selling your home and replacing it within two years. Also replaced is the once-in-a-lifetime exclusion of up to $125,000 in gain for anyone over the age of 55.

These rules are gone completely. Thousands of people have been living in appreciated homes, waiting for age 55 before they sell. This is not only unnecessary; the one-time exclusion is gone and waiting is no longer necessary. You can sell whenever you like without being taxed.

Many people would like to move to less expensive areas, which, in the past, meant being taxed on the difference between the sale and purchase prices. This could be substantial. In order to avoid this tax, many people bought more expensive and larger homes than they wanted. You no longer need to think that way.

Now you can sell your primary residence and move wherever you want. If you're an empty nester, you can even move to a smaller, cheaper home or move into an apartment if you prefer - without any tax consequences. Of course, if your profit is greater than the maximum, you will be taxed on the difference. Also taxed is any depreciation claimed while you owned the home. For example, if you rented out part of the house or used a room as a home office and declared depreciation on past returns, you are taxed for the amount of depreciation claimed even when your profit is under the maximum level.

Any past deferred profits are also forgiven, which is an extra benefit for many. For example, if you made a large profit selling a home several years ago, but bought your current home and deferred the gain, you used to be taxed on that deferred profit when you sold. Now the deferred profit vanishes, as long as you qualify for the other rules and the total profit - including deferred gain from prior sales - does not exceed the $500,000 or $250,000 cap.

This change, buried in Section 312 of the new law, was enacted with barely a whimper. It does represent a substantial tax benefit for thousands of Americans, and truly does simplify the record keeping.


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