Tax Relief From The Sale Of Your Primary Residence.









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Tax Relief For Your Primary Residence



"The Taxpayer Relief Act of 1997" was signed into law by President Clinton on August 5, 1997. This was the first major piece of tax legislation since the Tax Reform Act of 1986. For taxpayers owning a principal residence, the rollover rules and once in a lifetime exclusion rules have been replaced with new, and in most cases, more liberal rules for the treatment of a gain on the sale of a principal residence.

In the following paragraphs there is a brief outline of the new capital gains law and new rules for treatment of gain from the sale of a principal residence.

Reduced Capital Gains Rates:

For individuals, with net capital gain from sales or exchanges occurring after May 6, 1997, the maximum rate will be:

  1. * For property held more than 12 months, the sale of which occurred after May 6, 1997 and before July 29, 1997, the maximum rate of 20% will apply (10% for taxpayers in the 15% bracket);
  2. * For property held more than 18 months, the sale of which occurs after May 6, 1997, the maximum rate of 20% will apply (10% for taxpayers in the 15% bracket);
  3. * For property acquired after December 31, 2000 and held more than 5 years, prior to its sale, the maximum rate of 18% will apply (8% for taxpayers in the 15% bracket);
  4. * For property owned on December 31, 2000, a taxpayer may elect to be treated as a taxpayer who acquired property after December 31, 2000 for the purposes of the 5 year rule and the 18% rate (8% for taxpayers in the 15% bracket);
  5. * All depreciation taken on real estate shall be recaptured at the rate of 25%, in other words, for any real estate for which depreciation was taken (allowed or allowable), the amount of the gain attributable to depreciation will be taxed at 25% and the amount of the gain attributable to appreciation shall be taxed at either 20% or 18% as described above;
  6. * For sales before May 7, 1997 (no matter how long the property was held) and sales after July 28, 1997 (property held more than 12 months but not more than 18 months), the current 28% maximum rate will continue to apply.

Gain from Sale of Principal Residence:

This part of the act allows the taxpayer to exclude up to $250,000 of gain ($500,000 for married couples filing a joint return) realized on the sale or exchange of a principal residence. The Act applies to any sale or exchange that occurs after May 6, 1997. To be eligible, the residence must have been owned and used as the taxpayer's principal residence for a combined period of at least 2 years out of the 5 years prior to the sale of exchange. The prior law permitted a "Once in a Lifetime" exclusion of $125,000 of gain. Unlike the prior law, this exclusion will apply each time the taxpayer sells or exchanges a principal residence, although the exclusion may not be claimed more frequently than every two years. Also, unlike the prior law, the taxpayer is not required to acquire a replacement principal residence to claim the exclusion.

References:

  1. * * Publication 523, Selling Your Home
  2. * * Tax Topic 701, Sale of your home - after May 6, 1997
  3. * * Tax Topic 703, Basis of assets

Frequently Asked Tax Questions And Answers

Capital Gains/Losses/Sale of Home -

If I take the exclusion of capital gain tax on the sale of my old home this year, can I also take the exclusion again if I sell my new home in the future? There is no limit on the number of times you can exclude the gain on the sale of your principle residence so long as you meet the ownership and use tests.

References:

  1. * * Publication 523, Selling Your Home
  2. * * Tax Topic 701, Sale of your home - after May 6, 1997
  3. * * Tax Topic 703, Basis of assets

Frequently Asked Tax Questions And Answers

I sold my primary residence this year. What form do I need to file? If you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain is more than $250,000 ($500,000 if married filing a joint return).

This means that during the 5-year period ending on the date of the sale, you must have:

  1. * Owned the home for at least 2 years (the ownership test), and
  2. * Lived in the home as your main home for at least 2 years (the use test).

If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases. The maximum amount you can exclude will be reduced. If you are required to report a gain, it is reported on Form 1040, SCHEDULE D, Capital Gains and Losses.

For additional information on selling your home, refer to Publication 523, Selling Your Home.

References:

  1. * * Publication 523, Selling Your Home
  2. * * Tax Topic 701, Sale of your home - after May 6, 1997
  3. * * Tax Topic 703, Basis of assets

Frequently Asked Tax Questions And Answers

If I sell my home and use the money I receive to pay off the mortgage, do I have to pay taxes on that money?

It is not the money you receive for the sale of your home, but the amount of gain on the sale over your cost, or basis, that determines whether you will have to include any proceeds as taxable income on your return. You may be able to exclude any gain from income up to a limit of $250,000 ($500,000 on a joint return in most cases). If you can exclude all of the gain, you do not need to report the sale on your tax return.

For additional information on selling your home, refer to Publication 523, Selling Your Home.

*All information is accurate and reliable to the best of my knowledge but you should always consult your "Tax Advisor" or the IRS with any questions or irregularities before filing a return.

If you have questions about the sale of your principal residence, e-mail me at jp@julieparrishrealty.com.


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