Tax legislation packs some changes for many homeowners

Nation's Housing

October 01, 1995|By KENNETH R. HARNEY

WASHINGTON -- They represent just four easy-to-miss little items in a 700-page tax bill heading for House action. But they could prove highly significant if you:

* Expect to use the $125,000 exclusion for capital gains on your home sale profits after age 55.

* Maintain an office in your home and take depreciation deductions.

* Rent out your home for a couple of weeks and hope to keep the rental income tax-free.

* Want to use the standard tax-deferral "rollover" rules for home-sale profits after a divorce or separation.

Here's what legislation sponsored by House Ways and Means Committee Chairman Rep. Bill Archer, a Texas Republican, would do if passed by Congress.

Under current law, you can lop off up to $125,000 of the capital gain on the sale of your home and "exclude" it from any taxation whatsoever. To qualify, you must have reached the age of 55 prior to the date of the sale and used the home as your principal residence for at least three of the five years preceding the sale. You get this windfall just once in a lifetime.

But there's a glitch in the law. If you and your spouse take the exclusion, that's it. If through divorce or the death of your spouse, you find yourself single again and then remarry, you could inadvertently disqualify your new spouse from his or her own $125,000 exclusion. That's because under current law, husbands or wives who have already used the exclusion are what some tax specialists call "tainted spouses."

Say you bought a home two decades ago for $100,000 with your husband, since deceased. The house is now worth $400,000. You plan to remarry, and your intended new spouse is 58 years old and recently divorced. Prior to the divorce, he and his former wife took the $125,000 when they sold their home.

Here's the glitch: If you marry him and you both live in your present home, you could lose the tax right to take the $125,000 exclusion on the property for as long as you're married to him. Of course, you have a prenuptial strategic option: You could sell your current home and take the $125,000 exclusion on the $300,000 gain before heading to the altar.

The House's bill would allow otherwise qualified taxpayers to take the exclusion provided they owned their home for at least three years prior to marrying their new mate -- even though he (or she) had already made use of the exclusion.

Another item in the bill: If you have an office in your home and you depreciate it, you've got to take special care when you sell the home and roll over the gain, tax-deferred, into a new, more costly home.

Under the new bill, you could roll over just $95,000 of your gain. The remaining $5,000 would be subject to regular income taxation in the year of sale.

Two items in the bill that could touch you:

* Closing the loophole that allows homeowners to rent their dwellings up to 14 days a year and pocket the cash, tax-free.

* Eliminating the capital gains rollover anomaly that forces some divorcing spouses to live in the same house -- even if they would prefer living apart.

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