The Taxpayer Relief Act of 1997 abolished two previous laws that allowed for a “roll-over” and the “once-in-a-lifetime” tax benefit when selling a home prior to 1997.
When those laws were repealed, some homeowners thought that all benefits might have disappeared. However, this is not the case. The current law has many benefits for homeowners. Now, when you sell, and you are married couple, you can exclude up to $500,000 of capital gain. Individuals can exclude up to $250,000. Since the benefit is structured as an exclusion it does not have to be included in your income for tax purposes.
There are limitations to the benefit and these should be reviewed with your tax advisor before making any decisions regarding use of the tax benefit in your specific financial situation. One key limitation is that you must have used the home as your principal residence for two out of the previous five years before the sale. There are other limitations regarding marriage, divorce and occupation of the residence by your spouse.
In addition, the exclusion is generally available to a homeowner once every two years. A prorated exclusion may be available before the 2-year test is met if you have had a change of employment, got sick, or were the victim of unforeseen circumstances. The IRS has issued regulations regarding the applicability of any partial exclusion opportunities.
The Taxpayer Relief Act of 1997 applies to all principal residences. This includes single families, condominiums and cooperatives. Even if a boat is your principal residence, the law applies if these three things are present in the residence: sleeping quarters, a toilet and cooking facilities.
Useful information regarding the law is available in IRS Publication 523, “Selling Your Home.” It can also be accessed at IRS.gov.
Premiere Mortgage has offices in Maui and Kaua‘i and provides a wide range of services to the real estate community. Tricia Morris may be reached on Maui in Kihei at 874-8800, Wailea at 891-8900, West Maui at 665-8800, and on Kaua‘i at (808) 822-2300 or toll-free at (800) 813-7711.