MANY HOMEOWNERS have begun peppering congressional and tax experts with questions about how to make use of the Clinton administration's proposed new capital gains reforms for home sellers.
The Clinton plan would allow married individuals who file joint tax returns to pocket up to $500,000 of gain from the sale of a principal residence. Unmarried taxpayers, or married persons filing separately, could take up to $250,000 of profits tax-free.
To answer some of the most frequent questions about the proposal and where it stands on Capitol Hill, here's a quick overview.
When would the plan take effect?
Assuming it's passed by Congress later this year in its current form, the proposal would cover all qualified home-sale transactions occurring on or after Jan. 1, 1997. It would also allow taxpayers who sell a home after Jan. 1 but before the date of enactment of the legislation to choose between the current, long-standing rules regarding home-sale capital gains and the new law. For sales after the enactment date, you'd have to use the new rules.
Is it safe to bank on the Jan. 1, 1997, date in planning a home sale?
Never bank on Congress doing anything you want it to do. Clinton's proposal at this stage is just that. It's not law. And penny-pinching tax-writers frequently manipulate effective dates to lessen revenue losses.
However, there's a better-than-even chance that if Congress does pass the president's proposal, the Jan. 1, 1997, date will be the effective date. Two reasons: First, both Clinton and his Republican presidential opponent, Bob Dole, called for a Jan. 1, 1997, effective date in their tax proposals. Second, the amount of revenue that could be saved by moving to a later date would not be substantial, say congressional tax experts.
"With so many [homeowners] already believing Jan. 1 is the magic date," one staffer said, "it may not be worth the political flak to move it."
How would the new legislation affect seniors 55 years and older who planned to use the current $125,000 tax-free capital gains exclusion? Should seniors delay sales to take advantage of the new law?
The Clinton proposal would terminate the current tax-free exclusion for senior home sellers. Seniors who close on home sales between Jan. 1, 1997, and the date of enactment could still use the $125,000 rules if they wish. But most seniors with large capital gains undoubtedly would prefer the new, simplified rules in the Clinton plan. Besides the advantage of a much higher tax-free exclusion threshold -- $500,000 instead of $125,000 -- the Clinton plan would eliminate all the technical hassles associated with the current once-per-lifetime rules. Seniors with gains of more than $125,000 who want to be absolutely safe may wish to delay closing their sales transactions until Congress actually passes the Clinton proposals.
What about seniors who've already used their $125,000 exclusion? Would they be allowed to use the new capital gains plan for future sales?
The president's budget submission to Congress did not address this issue. It is possible, however, that when the proposal is drafted in legislative form, some limitation on taxpayers' use of both the $125,000 and the new, higher exclusion amount within a two-year period could be imposed.
To be eligible for the maximum tax-free treatment, how long must you have lived in your home prior to sale?
You have to own and occupy your house as a principal residence for at least two of the five years prior to the sale. If you sell one house tax-free, and then buy another and live in it for two years more, any capital gain on the second sale up to the $250,000- $500,000 ceiling could also qualify for tax-free treatment.
How would the tax-free home-sale concept interact with the sort of broad-scale capital gains tax reforms now being pushed by the Republicans?
If you've got a home-sale gain in excess of the $250,000 or $500,000 cap that applies to you, you'd pay a lower tax on the excess if Congress cuts the current 28 percent capital gains rate. The Republicans want a 19.8 percent top rate on gains from all capital assets, including real estate. That means that if you were a single taxpayer with a $400,000 home-sale gain, for example, you'd pocket the first $250,000 tax-free and pay 19.8 percent on the $150,000 excess. Instead of a federal tax bill of $42,000, you'd pay just $29,700.
Pub Date: 3/02/97