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Sale of Personal Residence
Selling one's
residence and moving into a smaller home or condo is seldom an easy
decision, but at least part of the decision-making process just
got a little easier. As part of the Taxpayer Relief Act of 1997,
Congress included a provision that will eliminate most people's
federal tax liability on gain from the sale or exchange of their
homes.
Under the
new law, up to $250,000 of the gain from the sale of single person's
principal residence is tax-free. For certain married couples filing
a joint return, the amount of tax-free gain doubles to $500,000.
Thus, you no longer have to reinvest the sales proceeds by buying
a more expensive house in order to "roll over" (i.e., avoid paying
tax on) your gain. Also, the new rules replace the one-time
exclusion of $125,000 of gain that applied to people over age
55. Since most people will not owe any tax on the gain from the
sale of a principal residence under the new rules, the hassle
of trying to document costs, expenses, and prices involving various
residences over the years should be alleviated.
Like most
tax laws, however, the exclusion has a detailed set of rules for
qualification. Besides the $250,000/$500,000 dollar limitation
described above, the seller must have owned and used the home
as his principal residence for at least two years out of the five
years before the sale or exchange. In most cases, taxpayers can
only take advantage of the provision once during a two-year
period. However, a reduced exclusion is available if the sale
occurred because of a change in place of employment, health, or
other unforeseen circumstances (that IRS may specify in future
regulations). The rules can get pretty complicated if you marry
someone who has recently used the exclusion provision, the residence
was part of a divorce settlement, you inherited the residence
from your spouse, you sell a remainder interest in your home,
or if you have taken depreciation deductions on the residence.
Not everyone
will be happy with this new law. Homeowners who sell at a loss
still will not be able to claim a deduction. Also, homeowners
with profits exceeding the $250,000/$500,000 limits may have to
pay more tax under the new law since Congress repealed the provision
allowing owners to defer gains by rolling over home-sale proceeds
into a new home costing the same or more.
We finally
have a tax break that most of us can actually use, and the tax
savings can be substantial. Please let me know if you have any
questions about this new law or would like additional information.
I would be happy to go over the specifics of your situation with
you to determine whether you qualify for this new tax break.
Be sure to
consult with a tax advisor for proper planning and implementation
of tax savings ideas to be sure they are right for you.
C.
David Pitzer, CPA, PC
118
Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711
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