Resources: Newsletter Articles: Capital Gains Tax Information

In 1997, the Taxpayer Relief act drastically changed the tax laws concerning capital gains on personal residences. Prior to 1997, homeowners who sold their residence could defer tax on their gain if they bought another home within two years of selling. However, the price of the new home had to be at least equal to the price of the home that was sold.

Under the Taxpayer Relief act, you don't have to buy another home to receive capital gains tax relief. You pay tax only on the gain that exceeds $250,000 for a single individual, or $500,000 for a married couple.

For example, if you as a couple bought your home for $300,000 in January 1997 and sold it for $450,000 in March 1999, your $150,000 gain is significantly less than $500,000. You would not be taxed on the gain.

The seller must qualify for this capital gain exclusion by having occupied the property for two of the five years before the sale. There is no limit on how many times you can take the exclusion, but it can be taken only once every two years.

A new tax law has been passed that refers to a sale of a home before the required two years. If you sell your home in less than 24 months, here is how to calculate how much tax you'd owe on your gain: multiply the exclusion amount you'd be entitled to if you owned for two years ($250,000 for singles, $500,000 if married and filing jointly) by your residency period expressed as a fraction of two years.

For example let's say you bought a $350,000 home in June of 1997, and you had to sell 18 months later. You close on the sale December of 1998, and realize a profit of $150,000. You're single, so you'd be entitled to a capital gain exclusion of $250,000 if you had lived at the property for two years. You've resided at the property for 75 percent of the statutory time period.

To arrive at this number, divide 18 months by 24 months (or 1.5 years by 2 years). Seventy-five percent of $250,000 is $187,500. So you will have no capital gain liability on this sale, because your $150,000 profit is less than $187,500.

The new tax law reduced the maximum capital gains rate from 28 to 20 percent, but the holding period was increased from 12 to 18 months. If you acquire a primary residence after Dec. 31, 2000, and hold it for at least five years before selling, the top capital gains rate will be 18 percent.

Source: Dian Hymer, SF Chroncile, June 6 1999.

sherrybenninger@grubbco.com

The GRUBB Co., 1960 Mountain Blvd., Oakland, CA 94611

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