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Broker
Realtor in Denver Colorado for Homes and Real Estate
Tax Relief for
Everyone!
On August 5, 1997,
President Clinton signed into law, "The Taxpayer Relief Act of
1997". This is the first major piece of tax legislation since the
Tax Reform Act of 1986. For those of you who now real property held
for productive use in a trade of business; or for investment and
other capital assets, the Act provides capital gain relief. For
taxpayers owning a principal residence, the rollover rules and once
in a lifetime exclusion rules have been replaced with new, and in
most cases, more liberal rules for the treatment of gain on the sale
of a principal residence. In the following paragraphs there is a
brief outline of the new capital gains law and new rules for
treatment of gain from the sale of a principal residence.
Internal Revenue
Service
Home Sale Exclusion Rule 2002
Reduced Capital
Gains Rates: For
individuals, with net capital gain from sales or exchanges occurring
after May 6, 1997, the maximum rate will be:
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For property
held more than 12 months, the sale of which occurred after
May 6, 1997 and before July 29, 1997, the maximum rate of
20% will apply (10% for taxpayers in the 15% bracket);
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For property
held more than 18 months, the sale of which occurs after May
6, 1997, the maximum rate of 20% will apply (10% for
taxpayers in the 15% bracket);
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For property
acquired after December 31, 2000 and held more than 5 years,
prior to its sale, the maximum rate of 18% will apply (8%
for taxpayers in the 15% bracket);
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For property
owned on December 31, 2000, a taxpayer may elect to be
treated as a taxpayer who acquired property after December
31, 2000 for the purposes of the 5 year rule and the 18%
rate (8% for taxpayers in the 15% bracket);
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All
depreciation taken on real estate shall be recaptured at the
rate of 25%, in other words, for any real estate for which
depreciation was taken (allowed or allowable), the amount of
the gain attributable to depreciation will be taxed at 25%
and the amount of the gain attributable to appreciation
shall be taxed at either 20% or 18% as described above;
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For sales
before May 7, 1997 (no matter how long the property was
held) and sales after July 28, 1997 (property held more than
12 months but not more than 18 months), the current 28%
maximum rate will continue to apply.
Gain from Sale of
Principal Residence:
This part of the act allows the taxpayer to exclude up to $250,000
of gain ($500,000 for married couples filing a joint return)
realized on the sale or exchange of a principal residence. The Act
applies to any sale or exchange that occurs after May 6, 1997. To be
eligible, the residence must have been owned and used as the
taxpayers principal residence for a combined period of at least 2
years out of the 5 years prior to the sale of exchange.
The prior law
permitted a "Once in a Lifetime" exclusion of $125,000 of gain.
Unlike the prior law, this exclusion will apply each time the
taxpayer sells or exchanges a principal residence, although the
exclusion may not be claimed more frequently than every two years.
Also, unlike the prior law, the taxpayer is not required to acquire
a replacement principal residence to claim the exclusion.
For those taxpayers
whose wish to take advantage of the rollover provision or the "once
in a lifetime" exclusion under the prior law, they must have either
(1) sold their principal residence prior to the date of enactment;
(2) entered into a binding contract for the sale of their principal
residence on or before the date of enactment; (3) acquired a
replacement residence or entered into a binding contract for the
purchase of a replacement residence on or before the date of
enactment. Enactment date was August 5, 1997.
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Frequently Asked Tax
Questions And Answers
Capital
Gains/Losses/Sale of Home - Property (Basis, Sale of Home,
etc.)
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What is the basis of
property received as a gift?
To figure the basis of
property you get as a gift, you must know its adjusted basis
to the donor just before it was given to you. You also must
know its fair market value (FMV) at the time it was given to
you and any gift tax paid on it. Refer to
Publication 551, Basis of Assets, for specific details.
References:
I have investment property.
Can you explain the term basis of assets?
Basis is your investment in
property for tax purposes. Before you can figure any gain or
loss on a sale, exchange, or other disposition of property,
or figure allowable depreciation, you must determine the
adjusted basis. Adjusted basis is the result of increasing
or decreasing your original basis according to certain
events. Your original basis is usually your cost to acquire
the asset. Additional information on basis and adjusted
basis can be found in
Tax Topic 703, Basis of Assets, or
Publication 551, Basis of Assets.
References:
I sold my home last year.
Do I have to report the sale?
Report the sale of your
main home on your tax return only if you have a gain and at
least part of it is taxable. Report any taxable gain on
Form 1040, SCHEDULE D, Capital Gains and Losses. Form
2119, Sale of Your Home is obsolete beginning in 1998. For
more information, refer to
Publication 523, Selling Your Home.
References:
I sold my primary residence
this year. What form do I need to file?
If you meet the ownership
and use tests, you will generally only need to report the
sale of your home if your gain is more than $250,000
($500,000 if married filing a joint return). This means that
during the 5-year period ending on the date of the sale, you
must have:
- Owned the home for at
least 2 years (the ownership test), and
- Lived in the home as
your main home for at least 2 years (the use test).
If you owned and lived in the
property as your main home for less than 2 years, you may
still be able to claim an exclusion in some cases. The
maximum amount you can exclude will be reduced. If you are
required to report a gain, it is reported on
Form 1040, SCHEDULE D, Capital Gains and Losses.
For additional information
on selling your home, refer to
Publication 523, Selling Your Home.
References:
If I sell my home and use
the money I receive to pay off the mortgage, do I have to
pay taxes on that money?
It is not the money you
receive for the sale of your home, but the amount of gain on
the sale over your cost, or basis, that determines whether
you will have to include any proceeds as taxable income on
your return. You may be able to exclude any gain from income
up to a limit of $250,000 ($500,000 on a joint return in
most cases). If you can exclude all of the gain, you do not
need to report the sale on your tax return.
For additional information
on selling your home, refer to
Publication 523, Selling Your Home.
References:
If I take the exclusion of
capital gain tax on the sale of my old home this year, can I
also take the exclusion again if I sell my new home in the
future?
There is no limit on the
number of times you can exclude the gain on the sale of your
principle residence so long as you meet the ownership and
use tests.
References:
What is the amount of
capital gains from the sale of a home that can be excluded
if sold in less than the two year waiting period?
If you owned and lived in
the property as your main home for less than 2 years, you
may still be able to claim an exclusion in some cases. The
maximum amount you can exclude will be reduced. Refer to
Reduced Maximum Exclusion and Special
Situations
in
Publication 523, Selling Your Home.
References:
I lived in a home as my
principle residence for the first 2 of the last 5 years. For
the last 3 years, the home was a rental property before
selling it. Can I still avoid the capital gains tax and, if
so, how should I deal with the depreciation I took while it
was rented out?
If, during the 5-year
period ending on the date of sale, you owned the home for at
least 2 years and lived in it for at least 2 years, you can
exclude up to $250,000 of the gain ($500,000 on a joint
return in most cases). However, you cannot exclude the
portion of the gain equal to depreciation allowed or
allowable for periods after May 6, 1997. Since you cannot
exclude all of the gain, report the entire gain realized on
Form 1040, SCHEDULE D line 8. Report the amount of
exclusion you qualify for on the line directly below the
line on which you report the gain. Write Section 121
exclusion in column (a) of that line and show the
amount of the exclusion in column (f) as a loss (in
parentheses).
For additional information
on selling your home, refer to
Publication 523,
Selling Your Home.
References:
How do you report the sale
of a second residence?
Your second home is
considered a capital asset. Use
Form 1040, SCHEDULE D to report sales, exchanges, and
other dispositions of capital assets.
References:
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