AFTER HALF a year of uncertainty, home sellers, buyers and real estate investors finally can tote up the score to see whether they've emerged winners or losers under the 1997 federal tax bill.
Here's a quick rundown of the final, compromise version of the legislation, along with answers to some practical questions you may have about the law.
* Capital gains. The new legislation scraps the system of "rollover" deferrals of tax liability on home sale profits. It also terminates the complex, $125,000 one-time "exclusion" on profits for home sellers 55 or older.
In its place, the legislation substitutes a much simpler system that will allow the majority of taxpayers who sell their principal residences on or after May 7, 1997, to escape federal capital gains taxes on their profits.
Married home sellers who file their federal taxes jointly will be able to take up to $500,000 in home sale gains, tax-free, provided they used the property as their principal residence for two of the previous five years.
Taxpayers who file a single return -- even if they're married -- will be able to take up to $250,000 of gain without capital gains taxation.
Home sellers can make use of the new rules as often as once every two years, assuming they have gains.
What if sellers have gains that exceed the $250,000 or $500,000 limits?
Any gains above the limit will be taxed at the new 20 percent capital gains rate -- down from the current 28 percent. Beginning in 2001, homebuyers who occupy their homes for more than five years may qualify for an even lower capital gains rate -- 18 percent -- on gains above the statutory limits.
* Capital losses on home sales. Though there had been efforts in both the House and Senate to permit homeowners who sell their properties at a net loss to take a capital loss deduction, the final package carries no relief for such sellers.
* Penalty-free Individual Retirement Account (IRA) down payment withdrawals to assist first-time home purchases. The final package allows penalty-free early withdrawals of up to $10,000 from an IRA to help with the down payment on a first-time home purchase.
* Home office deduction liberalization. Under the new law, thousands of self-employed taxpayers who run their businesses from their homes but who perform most of their business services outside the home will be able to deduct the costs of maintaining their office space as a business expense. The effective date of this provision, however, won't be until 1999.
* Depreciation "recapture." House and Senate conferees agreed on a 25 percent rate for recapture of depreciation deductions for investment and business real estate.
Taxable gains on sales of investment property attributable to an increase in the sales value of the property will qualify for the new nTC 20 percent capital gains rate. For sellers whose principal tax liability is for repayment of the depreciation write-offs they took, the 25 percent rate represents only a minimal improvement from current law, where their depreciation recapture rate is 28 percent.
* Tax-free real estate exchange cutbacks. Though the Clinton administration sought to limit the use of this increasingly popular technique, neither the House nor the Senate went along. The tax-free exchanging rules remain intact, allowing savvy investors to pay not 20 percent in capital gains -- but zero percent -- when they dispose of property that's increased in value for "like kind" real estate.
Pub Date: 8/10/97