(Excerpted from the 1997-98 Real Estate Continuing Education Update Course)
Sale of Principal Residence
"Rollover" Provisions Replaced
The old tax rules provided that gain realized on the sale of a principal residence is deferred ("rolled over") to the extent that the adjusted sale price (amount realized less fixing-up expenses) is reinvested in a new principal residence within a period beginning two (2) years before the date of sale of the old residence and ending two (2) years after such date.
Key Point
The "rollover" provisions have been replaced with provisions that provide a capital gains exclusion of $250,000 (for single taxpayers) or $500,000 (for married taxpayers filing a joint return) provided the taxpayer(s) has occupied the property as a principal residence for two (2) of the last five (5) years.
This is not a one-time exclusion. The exclusion applies to each sale of a principal residence so long as the occupancy requirement is satisfied.
Effective date - May 7, 1997. The new provisions apply to sales on or after May 7, 1997.
The new exclusion provisions also replace the old rules allowing taxpayers over the age of 55 to take a one-time exclusion of up to $125,000 in gain realized on the sale of a principal residence.
New Capital Gains Rates
The new long-term capital gains tax rates for gains on the sale of real estate and most other capital assets are 20% (for those currently in the 28% bracket) and 10% (for those currently in the 15% bracket). For investment real estate where depreciation has been claimed, the rate will be 25% for recaptured depreciation deductions and 20% for other gain attributable to an increase in value.
Effective date - May 7, 1997.
Effective with sales on or after July 29, 1997, the new longterm capital gains holding period is 18 months.
Beginning in the year 2001, the capital gains rates for property held over five (5) years will be 18%/8% (rather than 20%/10%).
Penalty-Free IRA Withdrawal for First-Time Homebuyers
The new law also permits "first-time home buyers" to withdraw funds penalty free from an individual retirement account (IRA) for use toward a home purchase. Details regarding these provisions are complex and confusing. Agents should refer any buyers with questions about this matter to their tax consultant.