Your Tax & Business Advisor
New Tax Break for Home Sales
By Raymond S. Kulzick, CPA, DBA
As published in the Pinecrest Tribune. February 2, 1998.
I understand that I won't have to pay taxes when I sell my home. Is this really true?
One of the most generous features of the 1997 Taxpayer Relief Act is a change in how the IRS treats sales of primary residences. Although this change in the law doesn't eliminate taxes, the practical result is that most people can avoid paying taxes when they sell their homes. Those who do have to pay will pay far less.
It is important to understand that special treatment is afforded only to your "principal residence." To qualify, the owner must have used the home as his or her principal residence for two of the preceding five years. Different rules apply to divorced or separated spouses. A job transfer or certain health situations may allow a partial exemption in some cases of less than two years residence.
Note that all home sales must be reported on your tax return, even if you don't owe any taxes.
For sales that closed after May 6, 1997, married couples can exempt up to $500,000 in gains from the sale of a qualifying principal residence. The exemption is $250,000 for single persons. In computing gain, any prior rollovers must be taken into account. Even if your gain is more than the exemption amount, you probably will be able to pay tax at the new, lower, 20% capital gains rate on the amount over the exemption.
The new exemption replaces the old tax breaks. Accordingly, the over-55 once-in-a-lifetime exemption and deferral of gain through roll over into a replacement residence are no longer applicable.
If you closed on or before May 6, 1997, the old rules still apply. There is also a time period between May 7, 1997 and August 5, 1997 when you may elect either the old rules or the new (but not both).
Two major problem areas for some taxpayers were not changed by the 1997 tax law. First, if you sell at a loss, the loss is still not deductible. Second, if you claimed an office in the home, a portion of the sale is a business transaction (not personal) and subject to tax, usually including taxation of all prior depreciation allowable.
This exemption does not apply to a second home, or to rental (or other business) property.
So, for most homeowners, Congress has provided a new and significant tax break that will eliminate much, if not all, of the tax on the sale of your primary residence.
Raymond S. Kulzick is a CPA, technology and management consultant with offices in Pinecrest at 12177 S. Dixie Highway. If you have questions or suggestions for future columns, please contact him at 305-233-2280 or rkulzick@kulzick.com. More information is also available on the firm's Web site at http://www.kulzick.com/businesspro.
This article provides information of a general nature only and should not be acted upon without seeking appropriate professional advice concerning your specific situation.
See also:
Kulzick Associates
PA - Tax Services
© Copyright 1998 Raymond S. Kulzick. All rights reserved. 980202.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.