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What Was Your Net Taxable Gain?
Taxpayers Relief Act of 1997
Tax-Deferred Exchanges
Capital Gain Tax Rates
Talk to Your Tax and Legal Advisors
WHAT WAS YOUR NET TAXABLE GAIN FROM THE SALE?
Oversimplified, your GAIN (profit) or loss from the sale of your house is:
What you received when you sold your house
Minus what you paid for your house.
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Your BASIS is what you actually paid for the house.
Your expenses must be taken into account.
Here's how you do it:
YOUR ORIGINAL PURCHASE PRICE $__________
Plus fees connected with the purchase of the house +__________
(closing costs, etc.)
Plus cost of capital improvements (not repairs):
Permanent landscaping $___________
Additions $___________
Remodeling $___________
Other $___________
Total of improvements +__________
Equals STARTING BASIS =__________
Less casualty losses (i.e., flood or fire) -__________
Equals ADJUSTED BASIS for calculating gain =__________
Now, let's look at the sale of your house and the expenses:
SALE PRICE FOR YOUR HOUSE $__________
Less real estate commission -__________
Less settlement costs -__________
Less sale-related fix-up expenses -__________
Equals ADJUSTED SALE PRICEof the house =__________
The final step: Estimate your taxable gain (or loss):
ADJUSTED SALE PRICE of the house $__________
Less ADJUSTED BASIS -__________
Equals NET GAIN =__________
(or loss) on the sale of the house
What you may owe your lender has no bearing on net taxable gain from the sale.
Please consult an accountant for tax advice.
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THE CHANGE IN TAX REPORTING REQUIREMENTS
The "Taxpayers Relief Act of 1997" signed by the President on August 5, 1997, modifies both capital gains treatment for sales of principal residences and Form 1099-S reporting requirements.
Capital Gains for Homes Sales
(for owner occupied personal residence)
Up to now, under prior law, taxpayers could generally rollover the gain on the sale of a personal residence into the cost of a replacement residence without paying any capital gains tax. For taxpayers over the age of 55, there was a one-time opportunity to exclude up to a $125,000 gain on the sale of a personal residence. Under prior law, taxpayers tracked their gain and filed Form 2119 to report the transaction with their annual tax returns.
The New Law
Under the new law (Sec. 312 of the "Taxpayers Relief Act of 1997"), taxpayers are generally able to exclude up to $250,000
of gain ($500,000 if married filing jointly) from the sale or exchange of a principal residence. The provision is generally effective for sales after May 6, 1997, although a taxpayer may elect to take prior capital gains treatment
if there is a valid contract in effect on August 5. The exclusion can be used once every two years. There are many limitations in qualifying for the capital gains exclusion. For instance, there is a requirement that the property should have been used as a principal residence for two of the last five years.
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Tax-deferred Exchanges
(for income property)
There are no changes in tax-deferred exchange rules. None of the Spring 1997 proposals made it to the final budget. The like-kind requirement continues to be very broadly defined. Exchangers still need Accommodators for delayed exchanges and only have 45 days to identify replacement properties.
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Capital Gain Tax Rates
Effective May 7, 1997 most investors will see a 20% capital gain tax, down from 28%. Investors in the 15% tax bracket will actually see their capital gain rate reduced to 10%. Investors will still be subject to state capital gain taxes (9% in Oregon). Therefore, with a straight sale instead of an exchange, a typical taxpayer with $100,000 gain will "only" pay $20,000 to the IRS and $9,000 to the State of Oregon.
For assets sold after July 28, 1997, the taxpayer must have held the asset for 18 months to be eligible for the reduced rate. Assets held less that 18 months are taxed at the 28% rate.
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Talk to Your Tax and Legal Advisors
There are some transition rules, not covered here, which affect sales between May 7, 1997 and July 28, 1997. Consult with your tax and legal advisors to understand the impact of these changes on your financial interests.
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