Tax Considerations

Homeowners Taxes-1997

If you are a homeowner expecting to have a capital gain on the sale of your home, Uncle Sam has given you a big present. The 1997 federal budget eliminated the traditional system of "rollover" deferrals of tax liability on home sale profits. The new rules are effective for principal residences sold after May 6, 1997.

If you are a married home-seller filing jointly, you will enjoy up to $500,000 in home sale gains tax-free, provided you have occupied the property as your principal residence during two of the last five years. Taxpayers who file singly (even if they are married) get a $250,000 capital gains exclusion. Home-sellers are eligible to exclude capital gains on the sale of a home as often as once every two years.

The new law allows capital gain exclusions whether you "buy up" to a more expensive home or "buy down" to a less expensive one. If you have a gain above the limit, it will be taxed at the new 20% capital gains rate, down from the current 28% rate. Beginning in 2001, the capital gains rate drops to 18% for taxable gains on a principal residence that you have occupied for at least five years. Consult your tax advisor for your particular circumstance.

Moving And Taxes

Even with the changes in tax laws over recent years, you may be able to deduct some of the expenses of a move that is the result of a change in your job.

You will probably be able to deduct the costs of your move if your new work location means more than an additional 50-mile commute, if you move within a year of taking the job at the new location, and if you work full-time for at least 39 weeks (the total is 78 weeks if you are self-employed). You should keep meticulous records of all of your expenses and consult a tax expert to make sure that you take all the lawful tax deductions allowed by the IRS criteria for expenses related to selling your old home or buying your new one. The IRS publication No. 521 entitled "Tax Information on Moving Expenses" makes good reading before you make a move.

New Tax Laws

One of the highlights of the new tax law signed in August, 1997, is a significant capital gains tax cut which allows American taxpayers to unlock equities and end the spiraling cycle of "investing up." First-time buyers will also see expanded rules for Individual Retirement Accounts (IRA) and 401(k) plans, allowing penalty-free withdrawals to purchase a home.

Every two years, married sellers of principal residences who file joint federal income tax returns will be allowed a $500,000 exclusion ($250,000 for singles) from capital gains tax and those who must pay will do so at a tax rate of 20 percent compared to the previous 28 percent. Depreciation recapture will be 25 percent for sales or exchanges and after the year 2000, some properties held for five years or more will qualify for an 18 percent capital gains rate. That's not all -- there will be a gradual increase in the estate tax exemption - from $600,000 to $1 million, and to $1.3 million for qualifying small businesses and family farms. This applies to all sales or exchanges occurring after May 6, 1997.

Homeowners can now consider several new options. Many people find themselves at an empty-nester stage (no children at home) in a four or five bedroom home with a large equity. For many of these people, their home has been their major investment and this new law will allow them to unlock the equity. They may help their children buy a first home, purchase that vacation dream-home or make other investments for retirement.

Consult your tax advisor for your particular circumstance.

Not at ARM's Length

A sale of a house is just a sale, right? Not necessarily. If you are selling your house to your children or transferring title outside the open market, then the transaction may be characterized as "not at arm's length". Since such a transfer may have tax consequences, you should discuss it with a tax attorney or accountant before taking action.

The transfer of title to a son or daughter may cause the parents to lose favorable property tax treatment, require the payment of state gift taxes, or have other unexpected consequences. From a capital gains point of view, it may be more prudent for children to inherit property than to receive it as a gift. The disposition of any real estate should be considered within the entire framework of your tax and estate planning.

For answers to all your real estate questions, consult experienced professionals who are familiar with this area.

Renting Your Home

Homeowners who don't need the equity from their home to purchase a new home may consider renting it instead of selling. Rental property is almost always a good investment, but you should understand the consequences of becoming a landlord.
Tenants may not share your pride of ownership and, therefore, may not maintain the property like you would. If you plan to rent your property, acquaint yourself with state or local landlord/tenant laws, including those dealing with rent control and eviction procedures. If the home you rent has been your primary residence, you could lose the benefits of a capital gains deferral when you sell it later. Get professional advice from a tax expert and a professional Realtor before you decide to turn your home into rental property.

Taming Taxes!

Buying a home is a good idea for a number of reasons, and one of the most important is the tax savings. At first glance, it may look like the monthly costs for your mortgage and taxes are much higher than the rent for a comparable home.

If you are planning to buy a $200,000 home, for example, with a fixed-rate 30-year mortgage at 7.5% with annual taxes of $1800, your monthly cost (principle, interest, and taxes) would be approximately $1,548. The good news comes when you consider your tax bracket and calculate the amount you save each month. During the early years of your loan, almost all of the mortgage payment and all of your local real estate taxes can be deducted on your federal returns. If you are in the 28% bracket for Federal taxes, you can save about $433 each month, bringing your net monthly housing bill down to $1115. When you take into account your state and local taxes, you may save even more.

Tax Breaks

Most homeowners are keenly aware of the interest tax deduction on their home loan, but there are many other tax breaks which are often overlooked at income tax time. Pro-rated property taxes and mortgage interest in the year of sale are deductible. You will find these amounts listed on your closing settlement statement. If you paid off your mortgage and had to pay a pre-payment penalty, it qualifies as tax deductible interest. If you paid an "acquisition mortgage loan fee" on a home loan, this fee can be deducted as itemized interest. Home improvement loan fees are also deductible. Any remaining loan fees from re-financed or paid-off mortgages are fully deductible at the time of the mortgage payoff.

Certain items don't qualify as deductions, but can be added to the cost basis of your home, such as transfer taxes, recording and title fees, and special local property tax assessments for new sidewalks, streets, or sewers.

Don't be intimidated by the tax code! A little research or consultation with an expert can help you maximize your real estate tax advantages.

Tax Deductions

The 1997 federal budget included tax cuts for American homeowners that will eliminate capital gains taxes for over 99 percent of home sales and dramatically simplify taxes and record-keeping for over 60 million homeowners.

With this change, a married couple filing their taxes jointly pay capital gains taxes only on that portion of home sales profits that exceeds $500,000. Single taxpayers, heads of households, and married persons filing separately exclude up to $250,000. The exclusion is available for all sales of homes occurring on or after May 6, 1997. Homeowners can use this tax-free provision every two years. Any homes sold prior to May 6 are still bound by the tax laws in effect at that time.

This change eliminated the $125,000 one-time tax-free exclusion for homeowners aged 55 and older and also replaces the rollover rules requiring the purchase of a replacement home of higher or equal cost within two years of the sale. However, buyers and sellers who signed a "binding contract" between May 7, 1997, and the day that the tax bill was signed (August 5, 1997) are authorized to use either the existing rollover law or take advantage of the new tax provisions. Consult your tax advisor for your personal circumstance.

Tax Deductions

A question which is often asked about real estate sales is which home loan fees are deductible for income tax purposes. It is good to know the answer to this question before you sign on the dotted line. It may influence which loan you will choose. Loan fees for certain services are not itemized on your fee statement, but are grouped together into a single category.

The most obvious deductible fee is the loan fee paid to acquire a mortgage for a principal residence. The IRS recently ruled that the buyer could deduct the fee in the first year, even if the seller paid it! Other deductions include pro-rated property taxes and mortgage interest. On these items, the buyer may only deduct their share.

Most of the other closing costs are not deductible; however, you may add them to your home's adjusted cost basis when calculating appreciation. Among these costs are appraisal, attorney, and inspection fees, as well as title, recording and notary fees. Fire insurance fees are neither deductible nor do they figure into the cost basis. If you are not sure which fees are deductible, consult a professional tax advisor.

Tax Reform

Tax reform has eliminated or phased out many popular tax deductions, but owning a home still offers significant tax benefits. If you are renting, it may be a good time to sit down with a professional Realtor to see how much you can save each year by owning your own home.

You save in two ways when you purchase a home. Even though most interest deductions have been phased out, home mortgage interest and state and local property taxes can be deducted. The interest on a home equity loan may also be deductible.

Your Realtor can show you how these savings will apply in your situation. You may be pleasantly surprised when you compare the tax savings you will receive as a result of owning your home, and you will build up equity as your home appreciates in value! Also, first-time buyers will see expanded rules for Individual Retirement Accounts (IRA) and 401(k) plans, allowing penalty-free withdrawals to purchase a home in the Taxpayer Relief Act passed in August, 1997. Consult your tax advisor for your particular circumstance.

Tax Relief

The Taxpayer Relief Act of 1997 signed on August 5, 1997, allows married taxpayers to exclude from capital gains taxes up to $500,000 in gains from selling a home (singles could exclude $250,000). This exclusion replaces both the one-time $125,000 tax exclusion available for taxpayers over age 55 and the deferral of capital gains when purchasing a more expensive home. This change exempts over 99 percent of homes sales from capital gains taxes and dramatically simplifies taxes and record-keeping for over 60 million homeowners. Taxpayers can use this exclusion every two years.

The new law allows capital gain exclusions whether you "buy up" to a more expensive home or "buy down" to a less expensive one. If you have a gain above the limit, it will be taxed at the new 20% capital gains rate, down from the current 28% rate. Beginning in 2001, the capital gains rate drops to 18% for taxable gains on a principal residence that you have occupied for at least five years.

Homeowners can now consider several new options. Many people find themselves at an empty-nester stage (no children at home) in a four or five bedroom home with a large equity. For many of these people, their home has been their major investment and this new law will allow them to unlock the equity. They may help their children buy a first home, purchase that vacation dream-home or make other investments for retirement.
Consult your tax advisor for your particular circumstance.

Taxable Profits

If you are thinking of selling your home and your house has risen in value since you purchased it, or you have accumulated a lot of deferred profit from previous sales, the new tax law passed in August of 1997 could be of tremendous value.

Prior to this new law, when a homeowner moved to a smaller home, relocated to a less costly area, or made a decision to rent, they were left with unfavorable tax consequences. The old tax law allowed people who sold their homes to defer tax on any profit by buying a replacement home of at least equal value within two years. At age 55, they could permanently escape tax on up to $125,000 of profit, but any profit over that was taxable unless a new home was bought. The good news is, starting with homes sold after May 6, 1997, homeowners will be able to make as much as $500,000 tax-free profits on the sale of a principal residence for joint filers or $250,000 for single filers. The $500,000 capital gains exclusion will remove taxes as a consideration for most home sellers by giving them flexibility to trade up or down. It will also allow them to preserve the savings value of a home when they sell, provided they used the property as their principal residence for two of the prior five years.

Consult your tax advisor for your particular circumstance.

Taxes Implications

Most of our sellers make a profit when they sell their homes. They often have questions about how capital gains tax will impact them.

If you are selling your primary residence, you do not have to worry about paying taxes on your profits if your gain does not exceed $250,000 as a single taxpayer (or $500,000as a married couple filing jointly). This new tax law comes from The Taxpayer Relief Act passed in August of 1997. Regardless of your age, you are now free to roll from none to all of your gain into another home without further tax consequences.

Different rules apply when you sell income property. If you sell one property then purchase another, the taxes will be due for the year the sale occurred. On the other hand, if you arrange to exchange one investment property for another, you can defer the capital gains tax. To ensure complete tax deferment you must acquire a replacement property which is equal or greater in price than your exchange property, and move all of your equity from the old property into the new. It is not as complicated as it sounds, but you do need professional help. Many Realtors and attorneys specialize in helping their clients put these1031 tax-deferred exchanges together.

The Tax Implications of Selling Your House

Most of our sellers make a profit when they sell their homes. They often have questions about how capital gains tax will impact them.

If you are selling your primary residence, you do not have to worry about paying taxes on your profits if your gain does not exceed $250,000 as a single taxpayer (or $500,000 as a married couple filing jointly). This tax law comes from The Taxpayer Relief Act passed in August of 1997. Regardless of your age, you are now free to roll from none to all of your gain into another home without further tax consequences.

Different rules apply when you sell income property. If you sell one property then purchase another, the taxes will be due for the year the sale occurred. On the other hand, if you arrange to exchange one investment property for another, you can defer the capital gains tax. To ensure complete tax deferment you must acquire a replacement property which is equal or greater in price than your exchange property, and move all of your equity from the old property into the new. It is not as complicated as it sounds, but you do need professional help. Many Realtors and attorneys specialize in helping their clients put these 1031 tax-deferred exchanges together.

The Taxpayer Relief Act

The 1997 federal budget made significant changes that benefit real estate. The capital gains tax exclusions on the sale of a principal residence is just one of several benefits for homeowners. The new tax law grants married couples up to $500,000 (singles $250,000) capital gains tax exclusion for the sale of their principal residence if they have resided in the home for two of the last five years. For assets sold after May 6, 1997, any profits in excess of the $500,000 (or $250,000 for singles) will be taxed at the new lower capital gains tax rate of 20% for those in the upper income bracket and 10% for those in lower tax brackets. The overall capital gains rates will go lower still in the year 2001, when the rate for the upper income bracket will drop to 18% and 8% for those in lower income tax brackets. This will be applicable for assets purchased December 31, 2000, and held five years or more.

The rollover provision in effect prior to the 1997 bill that allowed an individual to avoid capital gains taxes by purchasing a home of equal or greater value was repealed in favor of the new exclusion and is no longer effective. Consult your tax advisor for your particular circumstance.