If you’ve been keeping meticulous records over the years of your home additions and improvements for tax purposes–forget it.
Under the big tax bill moving through Congress, the $125,000 capital-gains tax break older people now get when they sell their home would be doubled for single owners and quadrupled for couples. And it would be available to everyone.
That means nearly all homeowners’ profits from selling a house would be exempt from taxation and therefore exempt from record-keeping.
The bill’s provisions make home purchases a more attractive investment for many families, not only because of the expanded capital-gains exclusion but because it would be available to homeowners of any age. Under existing law, you have to be 55 years old to qualify.
The chief benefit, however, would accrue to elderly homeowners whose houses have gained substantial value over the decades and who want to augment their retirement income and move to smaller quarters.
The changes could unleash an avalanche of home sales among these older people, who have been reluctant to move because of the current cap on the tax exclusion, said Tim Corliss, president-elect of the California Association of Realtors.
“It’ll definitely release a lot of property that’s been sitting captive to the capital-gains tax,” said Corliss, who runs RE/MAX West Side Properties in Los Angeles. “Just on the west side, there are about 15,000 elderly homeowners who’ve been watching and waiting for this to happen.
“Many of them paid $50,000 for their homes 20 or 25 years ago, and now their property is worth maybe $500,000. It’ll be a super help to them.”
Profit–or capital gain–is calculated by subtracting improvement expenses, such as adding a bedroom or building a garage, from the difference between the amount for which you sell your house above the amount you paid for it.
“It’s the purest form of tax simplification,” House Ways and Means Committee Chairman Bill Archer (R-Texas) said of the proposed legislation. “Nearly everyone who sells their house will no longer have to worry about proving (to the IRS) how much they spent for a new patio or remodeled kitchen, because it won’t matter–they’ll easily fall under the higher capital-gains exclusion.”
As many as 99 of every 100 homeowners would be freed from paying federal taxes on profits made from selling their houses, according to tax experts on the tax-writing Ways and Means Committee.
The bill also allows first-time home buyers who have individual retirement accounts (IRAs) to withdraw up to $10,000 toward the purchase price, without paying the 10 percent penalty for taking the money out prematurely.
These tax boons are part of a growing phalanx of federal rules that confer an almost sacrosanct status on homeownership in America. They would add to such things as income-tax deductions for interest paid on home mortgages and deductions for residential real estate taxes.
“Owning your own home is the American dream,” said Sen. John Breaux (D-La.), a member of the tax-writing Senate Finance Committee. “It should be strongly encouraged by the government.”
President Clinton thinks so, too. Though he has several quarrels with congressional Republicans over other features in the omnibus tax bill, he supports the hefty increase in the residential capital gains exclusion.
Thus, if you sell the house you’ve lived in for two of the last five years, you would be able to keep all of the profit up to $250,000 if you’re the sole owner. You could keep up to $500,000 if you and your spouse are the owners.
Under current law, profits from house sales are not taxed for anyone who, within two years of the sale, buys another house that costs at least as much. That tends to work against elderly people, who often seek smaller quarters later in life.
The current law limits the $125,000 after age 55 to once a lifetime. In addition to raising the limit and offering the break to everyone, the new law would let people take the exemption repeatedly, though no more than once every two years.
While the tax bill promises to be a bonanza for residential homeowners, realty investors are up in arms over an existing “recapture” provision that requires them to pay the top capital-gains tax on the savings they accrued from depreciating their investments, such as shopping centers, motels or apartments.
Jorge Cantero, president of the Realtor Association of Miami’s residential properties arm, said the recapture tax rate for real estate investments could end up being higher than the rate for other investments, such as stocks and bonds.
That could “wipe out any additional income we receive from residential sales that may be stimulated by the capital gains exclusion,” Cantero said.
Even so, he welcomed the increase in the new homeowners’ tax break: “That part is good for the industry.”
Some observers have grumbled that, with other tax breaks in Congress’ package, the capital-gains exclusion is more beneficial to affluent homeowners than to middle-income folks. But not even the purists are complaining all that much. That’s because all homeowners will get not only some relief from tax liability but a lot of relief from keeping detailed records for the IRS.
“I can’t get awfully excited about it,” said Robert McIntyre, director of Citizens for Tax Justice, which has sharply criticized other provisions in the tax bill as tilted too steeply toward the rich.
“For one thing, how many people have got homes on which they’d ever realize more than a half-million bucks in resale profit?” McIntyre said. “And Archer is right: It is an actual tax-simplification thing. The vast, vast majority (of homeowners) won’t have to bother about keeping records for the IRS anymore.”
As a matter of tax policy, said William Gale, an economist at the Brookings Institution, the capital gains exclusion is not all that controversial.
“Yes, it’s true residential housing is one of the most tax-preferred assets in the code,” Gale said. “If tax-writers are looking for places where taxes impose heavy burdens, residential housing is not one of them.
“On the other hand, this change seems to be kind of innocuous. It’s not going to break the bank, revenue-wise. Nor is it really outrageous, fairness-wise. And, let’s face it, it will be wildly popular, politically.”
