"Ask Nancy. She'll Know..."
Dear Nancy,
We are in the process of selling our home but are concerned. All of our children are grown and we'd like to downsize to a smaller home. Do we still have to purchase a home more expensive than the one we are selling to defer the capital gains on the sale?
-----------Empty Nesters!
Dear Empty Nesters,
Good question! You are correct in the past, specifically prior to The Tax Relief Act of 1997, buying a less expensive home could trigger the recognition of a gain causing tax consequences. However, under the old law, if the taxpayer was over 55 years of age, a once in a lifetime exclusion of $125,000 was available assuming certain rules were met.
Those were the old rules---the new rules apply to any sale of a principal residence made on or after May 7, 1997. Couples filing a joint tax return can exclude up to $500,000 of gain on the sale of a principal residence. Single return filers can exclude up to $250,000 of gain. The exclusion can be taken more than once, as long as the home has been used as a principal residence for two of the preceding five years!
But remember, this extremely generous exclusion applies only to the principal residences and doesn't apply to 2nd homes or vacation homes. This exclusion replaces the once in a lifetime exclusion reserved for people over 55 years of age. It will allow a homeowner who meets the requirement to make a tax free profit on the sale of a home without having to reinvest in another home. What's great is this provision should open many new strategies for homeowners that haven't been available in the past.
For instance, if a person is being transferred from a high cost area to a lower priced area, they can make a tax-free profit, subject to the limits on the sale, buy down and incur no tax liabilities. Another example might be a person who has a large gain in a rental property. They might want to convert it to a principal residence for two years and sell it and only pay tax on the depreciation recapture!
Exciting news, isn't it!!! I suggest that you seek the additional information and clarification from your friendly personal Tax Consultant or a CPA. And here's hoping this tidbit will save you some tax dollars!
Stay cool during this hot, hot summer and remember, if I can ever assist you or a friend with any real estate needs, please don't hesitate to call because...
I'd love to be your Realtor!
Nancy Dawsey, ABR, CRS, GRI
Signature Realty Associates
2234 Lithia Center Lane
Valrico, Florida 33594
813-624-4968 cell
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