Major federal tax changes were enacted recently in the Taxpayer Relief Act of 1997, and knowledgeable homeowners can clearly benefit. If you are selling a home, buying a home for the first time, or in certain conditions maintaining an office in your home, you stand to save tax dollars.
In the past, if you sold a home and purchased a new one within two years for at least the same price, you could defer the gain on the sale. Then, once you reached age 55, you could exclude up to $125,000 of the gain by making a one time election on your tax return. For those homeowners who weren't yet age 55, or those who had owned homes for many years and had deferred large gains, and wanted to downsize their homes, the tax laws put financial handcuffs on them. That all changed with the Taxpayer Relief Act of 1997. The new rules say that for sales made after May 6, 1997, taxpayers filing a joint return can exclude up to $500,000 in gain ($250,000 for individuals not filing a joint return). You can take the exclusion no more than once every two years, and the home must have been your principal residence at least two of the five year period ending with the sale. Your age doesn't matter. Gains on sales of primary residences not qualifying for the exclusion will generally be taxed at the reduced rate of 20%. This will clearly give more mobility to homeowners, and help to spur activity in the real estate market, which should in turn help appreciation.
The next change involves IRA's, or Individual Retirement Accounts. In the past, you could set aside funds tax-free into an IRA, with the only ability to withdraw funds once you reached age 59 1/2, unless you wanted to pay a substantial penalty. The Taxpayer Relief Act of 1997 make a number of changes to IRA's, including the establishment of a new version of non-deductible IRA called a Roth IRA. The tax benefit to this type of IRA is not the deductibility of the annual contribution, but the tax free investment gains. The change that affects home ownership is the provision that permits withdrawals of up to $10,000 from either the original or a Roth IRA for a principal residence of a first-time homebuyer. According to the experts, a husband and wife purchasing their first home together can each withdraw up to $10,000 from each of their IRAs without penalty for early withdrawal. Also, interestingly enough, the law defines a first-time homebuyer as an individual (and spouse) who have not owned a home for the preceeding two years. We all know what has happened to the cost of homeownership, and how difficult it is for young couples just starting out to purchase a home of their own. The government is providing some assistance here for them. While not the answer to affordable housing, a step in the right direction.
The last change deals with deductions for home offices. Since 1993, most tax deductions for home offices had been effectively eliminated. Congress has now again recognized that a growing number of individuals are managing their business activities from home. Beginning in 1998, a home office qualifies for tax deductions if, (1) It's used to conduct administrative or management activities, and (2) there is no other fixed location where you conduct substantial business activities. The change now allows you to claim tax deductions even if you also do your administrative or management functions from your car or hotel room, or if you occasionally do your work at a fixed location outside of your home.
There are many other provisions to the Taxpayer Relief Act of 1997 unrelated to home ownership. If you need further information on any of them, or need to understand how your own personal circumstances relate to these changes, please contact your personal tax advisor.
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