Capital Gains Tax Update
Will the tax bill recently signed by the President on August 5, 1997 impact the real estate industry?
Yes! The bill makes significant changes that will benefit real estate including capital gains tax exclusions on the sale
of a principal residence, a reduction in overall capital gains rates, penalty-free withdrawals from existing and new IRAs for
the purpose of a home by a first time buyer, increased deductions for health insurance premiums for the self-employed,
clarifications for the home office deductions requirements and reduced estate taxes.
If I sell my home how will I be impacted?
The new tax bill grants married couples up to a $500,000 capital gains tax exclusion for the sale of a principal residence
where the owner has resided two of the last five years. Singles enjoy a $250,000 exclusion. Any profit s in excess of the
caps will be taxed at the new lower capital gains tax rate. Best of all, this principal residence exclusion
can be reused over and over again.
Can I still "rollover" the proceeds from a home sale if I purchase a home of greater or equal value?
No. The "rollover" provision in current law, which allowed an individual to avoid capital gains taxes by purchasing a
home of equal or greater value, has been repealed in favor of the exclusion.
What if I am over 55 years of age and I already used my one-time exclusion of $125,000?
Can I take advantage of the new law?
Yes. Although the $125,000 exclusion for individuals over the age of 55 has been repealed, the new law allows any
couple, regardless of age, to exclude form taxes up to $500,000 in capital gains or $250,000 for singles every two years
for an unlimited number of transaction involving their principal residence.
I sold my home before the President signed the bill. Do I still qualify for capital gains tax exclusion?
Maybe. Sellers and buyers who have signed a "binding contract" between May 7, 1997 and the day President Clinton
signed the bill (August 5) are authorized to use either the existing rollover law or take advantage of the new tax provisions.
The tax laws would bind individuals who signed a contract prior to May 6, 1997 in effect at that time. For home sales after
the August 5 date, the new tax laws are applicable, although some individuals, who are in the midst of a two-year
rollover period, following an earlier sale, may be able to take advantage of the new exclusion.
Are losses on the sale of a residence deductible?
No. Taxpayers still cannot deduct on the sale of their residence.
What are the new capital gain rates?
Capital gain rates are based on the previous rate of 28% to 20% for those in upper income brackets and from 15% to
10% for those in lower tax brackets for assets sold after May 6, 1997. Overall capital gains rates will be lowered even
further in 2001, to 18% to 8% respectively, for assets purchased after December 31, 2000 and held five years or more.
No indexing of capital gains was included.
Has the holding period for assets to qualify for capital gains tax treatment changed?
Yes. Effectively July 29, 1997 assets must be held at least 18 months to qualify for capital gains treatments.
Previously, assets held 12 months were eligible for capital gains treatment.
Is investment property taxed differently than other assets under the new bill?
The new budget plan specifies that at the time of sale of an investment property, any gains due to appreciation will
be taxed at a reduced 20% rate and gains due to "depreciation recapture" will be taxed at 25%.
Have the rule governing 1031 "like kind" exchanges changed?
No. Despite reports that these rules might have been significantly changed, no provisions were included in the bill.
Can I withdraw money from my Individual Retirement Accounts (IRAs) for the purchase of a home?
The tax bill allows penalty-free withdrawals by grandparents, parents, children, spouses or principals of up to $10,000 form
existing and newly created "American Dream" IRAs for the down payment and closing costs of purchasing a first-time home,
after December 31, 1997.
ALL OF THESE MATTERS ARE SUBJECT TO REGULATORY INTERPRETATION. PLEASE CONSULT YOUR TAX ADVISOR.