I thought I would enclose this.
Found this on the internet. It explains it all at once without me having to outline it for you. If she has lived there for at least two years the following info will make you happy. She should seek an accountant who can answer any questions she may have.
Real Estate Capital Gains
Tax Law Change Highlights
by Verne F. Moser, CPA
The Mortgage Mart
August 1997
In a widely heralded spirit of bipartisan compromising, the Taxpayer Relief Act of 1997 was passed by Congress and has just been signed into law by President Clinton. While there is much debate about who of the taxpaying public will enjoy the most from the tax reduction provisions, one that can affect a cross-section of the American taxpayers is the reduction in the tax on the gain to be realized on the sale of real estate. For most of us, this is the home we have been buying for most of our working lives. The changes to the capital gains portion of the new law should be of eventual benefit to every homeowner when they ultimately sell without being able to defer the gain. A summary of the capital gains provisions below should be good news to us all:
Tax rates: Effective, July 29, 1997, all gain on residential real estate will be taxed at the new lower rate of 20%, down from a maximum of 28%. For any tax payer that is taxed at the 15% tax bracket and has capital gains included in income, the capital gains rate is 10%. Transition rules for the period May 7, 1997 (signing date of bill) to July 29, 1997, allow a taxpayer to qualify for the new rates if he has held the asset more than one year. Effective for tax years after December 31, 2000, the maximum capital gains rates are further lowered to 18% from 20% and 8% from 10% when assets are held more than five years.
Exclusions: The previous "over 55 one-time exclusion of gain" rules were repealed by the 1997 tax act. A new exclusion of $500,000 for married filing jointly or $250,000 for individual filers is now in effect. This exclusion is available every two years. To qualify for this new exclusion, the home must be used as a principal residence in two of the five preceding years prior to the date of sale. For couples claiming the $500,000, either taxpayer can own the property but both must meet the use test. A taxpayer that has had a previous excluded sale within the two year period that would normally preclude the use of the exclusion may still qualify for partial exclusion if the most recent sale was due to a change in place of employment, health or unforeseen circumstances ( all of which will be clarified in future regulations). Also, taxpayers who previously used the former "one-time exclusion" are eligible for the new exclusion rules.
Another provision that affected reporting home sale gains was the mandatory deferral of gain if the purchase price of the new home was larger than the "adjusted sales price" of the old home. This provision was also repealed by the 1997 law. For most of us, this mandatory reporting of gain in the year of sale will be covered by the new higher exclusion amounts, but for the high-end homeowner, reportable gains, even with the lower rates, will often result in taxes being paid in the year of sale rather than being deferred as homeowners trade up.
Holding period: Assets must be held 18 months, up from the prior 12-month period. As noted above, after year 2000, assets acquired and held more than five years will qualify for the lower capital gains rates. There is a special election process to have assets acquired before the year 2000 qualify for the lower rates by having the taxpayer report any built-in gain measured at January 1, 2001 in the taxpayer's return.
Depreciation recapture: For that portion of the taxable gain that equals any depreciation deducted or allowed by law, such gain will be taxed at a maximum rate of 25%.
Mr. Moser is a Certified Public Account in California. You can contact Mr. Moser at:
[email protected]
Return to Mortgage Mart Articles Table of Contents
