Last summer's tax changes benefit homeowners, investors

Staying Ahead

March 09, 1998|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

THE NEW tax law, passed by Congress last summer, was custom-designed for investors and homeowners. The tax rates on capital gains were slashed. The profits on most sales of homes will no longer be taxed at all.

But no good deed goes unpunished. This year, it takes 36 lines on the Schedule D to figure out what your capital-gains tax is going to be. Here's what's new:

Taxable capital gains. You earn a capital gain when you sell an investment for a profit or when your mutual fund takes a cash profit for the year. Short-term capital gains are taxed as ordinary income. Long-term gains get a lower rate.

Before the law passed, you had to hold an investment for more than 12 months to get a long-term capital gain. Under the new law, you have to hold for more than 18 months.

On gains taxed under the old law, you pay 15 percent in the lowest bracket and 28 percent in the higher brackets.

On gains taxed under the new law, you pay just 10 percent in the lowest bracket and 20 percent in the higher brackets.

The rate stays at 28 percent for gains on collectibles, such as art and antiques. But it drops to 25 percent on gains from real-estate depreciation. The special problem this year is that you may have both old-law and new-law capital gains.

The new rates apply to investments sold in 1997 from May 7 through July 28, provided you held them more than 12 months. They also apply to investments sold after July 28, provided you held them more than 18 months. Otherwise, you're taxed at the (( old, higher rates.

You can probably figure the tax by hand, if you're reporting gains on just a couple of investments. Simply follow the step-by-step calculation on Schedule D.

If you have lots of gains and losses, get a tax software program or let an accountant figure it out.

Even people whose only capital gain is from mutual fund distributions now have to file a Schedule D. Previously, you could report your gain on the 1040 form.

Home sales. The new rules on gains when you sell your house are a whole lot simpler. Most people pay zero. Your home has become the equivalent of a tax-exempt bond, with central heating and good beds. The rules:

(1) You probably owe no tax if you sold your house May 7, 1997, or later. For single people, gains up to $250,000 are now tax-free. Marrieds can exempt gains up to $500,000. (Note that that's the size of your gain, not the sale price of the house.)

(2) If your gain is larger, it can no longer be deferred. You'll owe a long-term capital gains tax, in the year of sale, on the profit above $250,000 or $500,000.

(3) To qualify for the new tax exemption, you must have owned and lived in the house for at least two of the five years prior to the date of sale.

(4) If you sold before May 7 of last year, the old rules apply. You're still allowed to defer the tax if you buy a new house of equal or greater value. You'll get the permanent tax exemption the next time you sell.

(5) If you sold from May 7 to August 4, you can use either the old rule or the new one. This gives people with jumbo taxable gains one last chance to defer.

(6) What if you own two homes? You can get a tax exemption for both, if you live in them sequentially. Sell your principal home, move to your vacation home for the next two years, then sell it, too.

(7) What if you currently have a home office and take a tax deduction for depreciation? When you sell, the "office" portion of the house won't be tax-exempt. Your gain on that portion will be taxed at 25 percent.

Big, fat retirement accounts. Under the old law, you were penalized if you invested too well and your account grew too big. At 70 1/2 , when mandatory withdrawals started, you paid a 15 percent penalty on withdrawals over a certain amount. Now you're free to build as fat a retirement fund as you can.

Pub Date: 3/09/98

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