As the year draws to a close, many Americans are still trying to grasp all the revisions in the tax law
that went into effect last summer as part of the Taxpayer Relief Act of 1997. One of the changes that has the most impact on homeowners is the new capital gains tax, which substantially increases the exemption for those who sell their primary residences, while also reducing the tax rate from 28 to 20 percent. For those people looking to sell their homes and take substantial profits, this is very good news. In addition, the tax savings incentive could be instrumental in spurring sales and freeing up residential inventory, good news for the real estate market which has been faced with shortages of large Manhattan apartments for sale over the past year or so.
A Winning Combination
The actual reduction in capital gains tax, from 28 to 20 percent, is fairly substantial. But it is the increase in the amount of gains that are exempt from taxes that clearly spells the advantage offered by the new law, which applies to sales after May 7, 1997. Married homeowners filing jointly can now exclude up to $500,000, and individual homeowners up to $250,000, in profit on the sale of a home that has been a primary residence for at least two of the five years preceding the sale.
Under the old law, a two-year tax deferral was allowed following the sale, after which the profits had to be reinvested in another property of equal or greater value in order to avoid capital gains taxation. So under the old law, the profits from the sale of a home were never fully realized in the long-term; they were simply shifted to another property.