How will the capital gains tax laws affect my loan?

$500,000 IRS Tax Exclusion

• The following relates to the Federal bill signed on August 5th, 1997 that provides tax gain exclusions for principle residences up to $500,000!
  
  
• You must be married and file a joint return to receive $500,000. The amount for non-joint return is $250,000
  
  
• You may claim this exclusion every two years and you do not have to buy a new residence to do so
  
  
• Those that claim a home office have to depreciate a recapture on that portion - see your tax accountant.
  
  
• All age restrictions have been eliminated. The old law was age 55 and had a limit of $125,000.
  
  
• You must have owned the home for at least two years of the five year period ending on the sale date.
  
  
• You must have used the residence as a principle residence for which the exclusion is taken after May 7, 1997 or face a gain tax.
  
  
• A property that is partially used as residence may qualify for homestead status if occupied by December 1st, however county assessor notification is required by December 15th.
  
  
• If the residence you are selling was acquired as part of a rollover transaction, you may be allowed to include the period of time you owned and used your former residence.
  
  
• You may not claim this exclusion if either you or your spouse sold a principle residence during the two years that qualification is based for the tax claimed property.
  
  
• The property does not have to be your principle residence at the time of sale, in fact it could even be rental property.
  
  
• If there is a gain to calculate, it will be based at a capital gains rate of 28-20% (10% for those in the 15% bracket. This is a reduced rate from the former tax laws.
  
  
• The new law does not exclude you from eligibility should you have claimed the old $125,000 exclusion.
  
  
• Should you own a home with another single person, you may each claim $250,000 exclusion. You do not have to use this exclusion. However any gain would be taxable because the old rollover option has been repealed.
  
  
• No sales made before May 7th, 1997 will qualify. If your spouse dies you must sell your home within the same year in order to claim the $500,000.
  
  
• Should you have to sell before the two year period of ownership you may still claim without capital gain should health or employment be involved. Should you sell your residence at a loss it will remain nondeductible.
  
  
• If your gain is less than $500,000 (for married) and $250,000 (for single) any unused portion will disappear. However, you will still be eligible for the entire exclusion 2 years after you sell.
  
  
• Both you and your spouse must meet the 2 year use of principle residence. There is no exception. Should you have transferred ownership to an irrevocable living trust you may still be able to revoke and claim ownership.

See an accountant

You do not have to purchase a replacement residence in order to claim the exclusion.

For Federal purposes you should maintain records of purchase, improvement, and sale.

You might be able to claim the exclusion more than once under very limited circumstances that include health or change of employment. (See an accountant)

The new $500,000 tax exclusion is now revalidated every two years! It used to be once in you lifetime.

Primary-home tax exemption Thanks to the 1997 Tax Act, its repeal of the old home sales tax rules and its enactment of simple, new rules, most home sellers can now completely avoid tax on their sale profit.

New Internal Revenue Code ?121 says up to $250,000 of profit per qualified home seller (up to $500,000 for a married couple filing jointly) is tax exempt.

Even home sellers who used the old "over 55" rule and/or the "rollover replacement rule" can use this new tax exemption. To qualify, the seller must have owned and occupied the principal residence any two of the last five years before the sale.

For married couples, only one spouse need hold title to the home. However, the nontitle spouse must meet the two-year occupancy requirement.

Absences due to physical or mental incapacity require only one year of residency during the last five years before the sale. This new tax break can be used once every 24 months.

But more frequent prorated use is allowed if the home sale is due to change of employment location, health reasons, and other "unforeseen circumstances."

What is a principal residence?

A principal residence is the taxpayer's primary dwelling, usually where he or she votes, files income tax returns, works, has a driver's license or spends the most time. A taxpayer cannot have more than one principal residence at a time.

Divorced and separated couples gain big tax benefits. When a home is occupied by a divorced or separated spouse and the other spouse lives elsewhere, if the "in" spouse qualifies for this new tax break, the "out" spouse also qualifies for up to a $250,000 home sales tax exemption.

If title to any real estate was transferred between spouses during the marriage or as part of a divorce, Internal Revenue Code ?1041 says no gain or loss is recognized. It's a tax-free gift between spouses.

But such a divorce property settlement could result in the entire property sale gain being taxable to just one spouse.

Second-home tax exemption

At first glance, the new Tax Act appeared to have no effect on vacation or second home tax breaks. But thousands of vacation home owners are discovering that they can qualify for the major new $250,000 tax exemption reserved for principal residences.

A typical situation is a "snowbird" who owns a family home in the Midwest and a winter home in Arizona. Until now, the profitable sale of these second or vacation homes couldn't qualify for any tax exemptions.

They weren't principal residences, nor were they investment properties. But the 1997 Tax Act, as astute tax advisors have discovered, changed that. For example, suppose a husband and wife have owned a Florida winter home for many years, which they can now sell for a $200,000 profit.

If either spouse, or both spouses, lives in this residence as their primary residence for a total of 24 out of the 60 months before its sale, the profit can be tax-free. A qualified husband and wife filing a joint tax return can claim up to $500,000 of tax-free sales profits.