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Tools
and Resources: Tax Relief Act of 1997
Summary
of the impact on capital gains for the home buyer and investor.
Home
Sale Exclusion
- Old
Rules Repealed - The roll over rules of old IRC 1034 and the
one time exclusion of $125,000 under the old IRC 121 are repealed
for sales of principal residences occurring after May 6, 1997.
- Basic
New Rules - Under the new IRC 121, gross income does not include
gain from the sale or exchange of property if certain requirements
are met. The property must have been used by the tax payer as
a principle residence for periods aggregating at least two (2)
years out of the five (5) year period prior to the sale.
The
maximum exclusion from income is $250,000 or $500,000 for married
couples filing jointly. The exclusion does not apply to a sale within
two (2) years of another sale to which the exclusion is applied.
Any profits in excess of the $250,000 or $500,000 will be taxed
at the new lower capital gains tax rate.
- Waiver
of Requirements - The rule limiting the exclusion to one sale
every two (2) years and the minimum ownership and use requirements
are waved for sales caused by a change in the place of employment,
health or unforeseen circumstances. A reduced exclusion would
apply instead based upon the faction the actual use bears to two
(2) years multiplied by $250,000. This means that the principal
residence exclusion can be reused over and over again.
-
Husband and Wife - To claim the full $500,000 exclusion, both
husband and wife must each qualify. On a joint return, a $250,000
exclusion may be claimed if either spouse qualifies. Property
transferred under IRC 1041 incident to a divorce will tack the
transfer spouse's ownership holding period to the transferee spouse's
and an individual is treated as using the property as a principal
residence while the individual's spouse or former spouse is granted
use rights under a dissolution of separation agreement. A surviving
spouse is given credit for the use of a deceased spouse.
- Prior
Use of Old IRC 121 - The previous use of the $125,000 one-time
exclusion is immaterial for purpose of the new exclusion for individuals
over the age of 55 has been repealed. The new law allows any couple
regardless of age to exclude from taxes up to $500,000 in capital
gains or $250,000 for singles.
IRC
Section 1031 and the "Starker Exchange"
IRC
Section 1031 provides for the deferral of capital gains tax which
would arise from the transfer of appreciated real property held
for productive use in trade or business or for investment purposes,
if the properties exchanged for "like-kind" property to
be held for the same purposes.
IN
1979 the case of T.J. Starker v. United States, a landmark decision
was made by the U.S. Court of Appeals which qualified nonsimultaneous
"delayed" real property exchanges for tax deferral under
IRC Section 1031. The decision was strongly opposed by the Internal
Revenue Service. Congress, through the passage of the Tax Reform
Act of 1984, amended IRC Section 1031 to allow delayed exchanges.
This amendment required all replacement property to be identified
and acquired within specified time periods and reaffirmed that a
sale followed by the reinvestment in like-kind property would not
qualify under Section 1031.
In
order to qualify for tax deferral, it is necessary to structure
an exchange that would create a reciprocal trade of properties and
to refrain from constructive or actual receipt of proceeds from
the sale. This would prevent the transaction from being characterized
as a taxable sale and reinvestment. While no uniform structure has
yet been established by the IRS, according to the provisions, a
delayed exchange may be utilized by any taxpayer who owns property
which would otherwise qualify for tax deferment under Section 1031.
See
your tax lawyer or accountant for further explanation and answers
to your questions.
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