To almost all of us, May 5, 1997 is a rather remote date. I mean most of can slowly become aware of legislation enacted more than 13 years ago, which "changed the financial landscape of the real estate world". It is for that reason that I remain amazed, today, when people ask me what kind of replacement property they must purchase, and when, so that they can avoid capital gains taxation on the sale of their residence.
With real estate values stagnant, or even depressed, the stakes of the tax aspects of selling your home have dimished. On the other hand, it is my opinion, the 1997 legislation, which arrived without a lot a fanfare or ballyhoo, is, arguably, the single biggest tax break ever provided to the average American (I rank it up there with the unlimited marital estate tax deduction) and you, as a real estate professional need to know about its provisions, and how it can be used as "the gift that keeps on giving.
This is how you are treated if you sell the property you occupied as your principal residence for at least two of the last five years, immediately prior to the sale:
1. You can eliminate tax on the first $250,000 of gain on the sale. This means "net gain" so you can deduct selling costs and brokerage expenses to arrive at the price.
2. If you are married when you sell, increase the number to $500,000.
3. There are certain technical remedial rules available if your sale is completed when you own your home for less than two years, if you job forces you to sell your h and relocate.
4. There is no limit to the number of times you can obtain the $250,000/$500,000 exclusions, as long as you have occupied the real preoperty as your principal residence for at least two years.
Having described the rule, I present to you the following scenarios where I have double and even triple "dipped" into the largess permitted by this liberal tax break:
1. Sell your principal residence; move into your ski house or vacation condominium for at least two years and claim that venue as your principal residence. You can use the exclusion when you sell your "home" then after.
2. Do a Section 1031 exchange into a rental condominium to defer taxes on same until the property is sold. Use the property as an investment property for 2 or 3 years (consult your accountant for current IRS thinking) and then move into the investment property and make it your personal residence. lLve there for at least two years, and the sale should permit an additional exclusion.
There are more ways to use this "gift from the government". I would gladly discuss strategies with you if you wish. The revenue impact of this "gimme" is large. Do not be shocked if you start hearing rumblings of its repeal as our Federal government struggles with fiscal problems. In the meantime, "make hay while the sun shines".
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