If you plan on selling your house, recent changes to the tax law could allow you to keep more of the profit than you could have under previous regulations. The new rules affect taxpayers of any age, but certain aspects of the law are especially beneficial to older homeowners.
The new tax provisions went into effect last August. Essentially, changes to the tax code were made regarding the sale of a person’s principal residence.
Under the old law, if you sold your house and you were at least 55 years old or older, you could exclude gains of up to $125,000 from taxation. Seniors who had lived for years in the same house, if it appreciated, could fatten their financial cushion.
But taxpayers complained about certain aspects of the old law. The gain was cumulative over a lifetime. You had to keep track of what you invested in each home. And you had to trade up when you bought a new house to avoid paying capital gains taxes.
Another hitch really bothered seniors. If you took the exclusion and later remarried, your new spouse was not allowed to take the exclusion. In other words, one person could taint the other’s eligibility for the exclusion.
Now that’s all changed. There is no age restriction under the new law. The gain is not cumulative. If you get remarried, you can’t ruin someone else’s chances to get the tax break. And you can exclude the gain, up to a certain amount, on each house you sell.
“This is one of the most pro-taxpayer changes that Congress has made in 20 years,” said Linda Goold, tax counsel at the National Association of Realtors in Washington. “It tidies up home selling for everyone.”
The Treasury Department estimates that only about 10,000 existing home sales this year will be subject to capital gains tax–that’s out of an estimated 4.8 million transactions.
“It’s dramatic. This illustrates how pro-taxpayer the new rules are,” Goold said.
It wasn’t all that hard to change the rules because even under the previous law, not a lot of taxes were being collected. The old $125,000 exclusion covered about 80 percent of the taxable transactions.
And the IRS estimates that about only 20 percent of those paying capital gains under the old rules used the right figures to compute their taxes anyway.
For the 55-plus crowd, the biggest benefit is the size of the exclusion allowed–up to $250,000 for singles and up to $500,000 for married couples filing joint tax returns.
Homeowners are not limited to a one-time exclusion either. That means they can get the exclusion on every house they sell.
For example, if you and your spouse have the remarkable good luck to have a $600,000 gain on a primary residence, you will pay capital gains on $100,000. Then if you buy another house and have the really remarkable fortune to have another huge gain, say $700,000, you can exclude $500,000 again. Each transaction is a fresh start.
People who have owned a number of houses in the past and used the old rollover replacement rule to defer capital gains don’t have to keep track of their gain going forward anymore.
They still will need to know the previous tax basis, or how much was invested in the old house or houses, however. This is calculated as the original purchase price, including many of the closing costs, plus the cost of improvements (but not simple maintenance) made over the years. So don’t throw away your old records.
None of the new rules apply to second homes. You must have lived in the house as your principal residence for two of the previous five years to get the exclusion.
If you own a condominium in Florida, you can pretty much count on paying some kind of capital gain on its sale, assuming it has appreciated in value. If you want to get the exclusion, you have to sell your principal residence and then move into your second home for two years. Simply spending the winter in your Florida condo doesn’t do for the IRS principal residence rules.
None of this applies if your elderly parents die and leave behind a house to be sold. That situation presents a whole different set of tax problems.
The new tax law is expected to reshape some of the landscape in real estate sales, especially in the empty-nester market. Because homeowners no longer will have to purchase a property of equal of greater value to defer capital gains, empty-nesters will be freed to truly downsize their housing both in size and in price.
Real estate agents in some parts of the country are already reporting a pickup in activity in the empty-nester market, but as yet there has been no mad rush to cash in on the new capital gains tax law.
Still, with the tax consequences simplified, it is going to free many older homeowners to explore a wider variety of options in today’s market.
Resources
The National Association of Realtors has a good question and answer document that covers some of the knottier questions related to changes in the capital gains tax law for home sales. Check out the NAR Web Site at www.Realtor.Com. Click on the government affairs button.
Or you can call the NAR’s government affairs customer service representative at 202-383-1194.
The IRS has a publication that explains all the rules too. Call 1-800-829-1040 and ask for publication 523, “Selling Your Home.”
Or you can pick up a copy at the following IRS offices: 230 S. Dearborn St., Chicago; 7601 S. Kostner Ave., Chicago; 2001 Butterfield Rd., 12th Floor, Downers Grove; or 8125 N. River Dr., Morton Grove.
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Jane Adler is a Chicago-area freelance writer. If you have questions or information to share regarding housing for senior citizens, write to Senior Housing c/o Chicago Tribune Real Estate Section, 435 N. Michigan Ave., 60611.
