Capital Gains on Home Sales with 1997 Tax Act

Capital Gains on Home Sales with 1997 Tax Act

Old tax law regarding capital gains and home sales

New, improved tax law

Old tax law regarding capital gains and home sales

Required purchase of a new home of cost equal to sale price of old home to avoid paying capital gains

This lead people to buy more home than they may have needed to avoid paying taxes

Allowed a one-time $125,000 exclusion of gain for taxpayers over the age of 55 who sell their home

New, improved tax law

Single filers receive a $250,000 exclusion, and joint filers a $500,000 exclusion, of gain related to the sale of a principal residence

This is one item which greatly simplifies the tax code

Most homeowners will own no capital gains taxes on their homes, and thus they won't have to keep records to prove the cost basis of their existing home

Must have lived in home for two of the last five years

If less than two years, exclusion is proportionally reduced

For example, if you lived in home only 18 months, and were married, you may qualify for a (18/24) * $500,000 = $375,000 exclusion

Unlike old law, this is not a one-time exclusion

Can use exclusion every two years

Excellent way to make tax-free income if you like to renovate homes

Unlike old law, exclusion is totally independent of new home purchase

You can even move into an apartment

Now you can find new housing based on common sense, not tax considerations

One bad point which new law doesn't change

You still can not deduct the loss on a home sale against your other income