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GREATER PROFITS FROM SALE OF PRINCIPAL RESIDENCE
By: Gary H. Bregman, Esq.
President Bill Clinton signed into law the Taxpayer Relief Act of 1997. The act put into play many changes in our federal tax code, some of which affect the purchase and sale of real property. Owners of real property should investigate ALL CURRENT changes in the law with their tax professional before proceeding with any transaction. One of the most exciting changes in the 1997 Act concerns the sale of principal residences.
SALE OF PRINCIPAL RESIDENCE RULES TRANSFORMED
Subject to certain rules and restrictions, up to $250,000 in realized net profit from the sale of a principal residence is tax-free for single income tax filers. Better yet, up to $500,000 in realized net profit is tax free for married joint filers. The tax-free effect may be realized with these conditions:
All sales of principal residences which were subject to a binding contract before May 7, 1997, fell under the old rules. The old rules were governed by Sections 1034 and 121 of the IRS code.
Section 1034 allowed the seller of a principal residence to sell and "roll over" all net profits into the purchase of a new residence of equal or greater value and delay the payment of capital gains tax. The 1034 rollover provision in most cases is no longer available.
The down side to the 1997 rules is in situations where single or joint taxpayers realize gains greater than $250,000 or $500,000 respectively, no protection is afforded from tax consequences incurred.
Another protection which is no longer available is IRS Code Section 121. Section 121 allowed a taxpayer 55 years or older to exclude up to $125,000 of gain from gross income by making a one time election. The effect of the elimination of this law will likely be minimal. Under the new law, a unmarried taxpayer of any age can use the $250,000 profit exclusion and married joint taxpayers may use the "up to" $500,000 profit exclusion. Section 121 is no longer available for transactions, dated after May 7, 1997
CAUTION: CONSULT YOUR TAX PROFESSIONAL BEFORE SELLING OR PURCHASING REAL PROPERTY TO DETERMINE HOW THE CURRENT TAX LAWS WILL AFFECT YOU!