WHO THE NEW TAX LAW AFFECTS

A homeowner with considerable equity in their home. They can sell their house and not have to pay taxes on up to $500,000 in capital gains whether they buy a new house or not. Empty nestors can use that cash for a smaller residence and maybe a vacation home. They can take advantage of the current stock market to build an investment portfolio for their retirement.

Note - A homeowner can sell a large house, take the tax break and purchase a smaller residence and a vacation home. They can live in the new primary residence for at least two years and benefit from the tax exemption - then convert their vacation home to a principal residence, live there for two years and take the tax break on that too.

An empty nester that had been waiting to turn 55 to take advantage of the onetime capital gains exemption of $125,000. There are no age restrictions on the new exemptions. They can sell their house now.

Note - The old one-time only law no longer exists. Those who have already taken advantage of this opportunity can take advantage of the new law and its more liberal exemptions.

A first time buyer trying to save enough to buy a house. They can use money they have saved or a relative has saved in an IRA account.

Note- This is a one-time opportunity and is limited to a $10,000 withdrawal. It can be used by someone who has owned a house before, if they haven't owned a house within two years.

Anyone buying a house with the potential to increase in value. When they sell that house they won't have to pay taxes on up to $500,000 in capital gains. The law permits that exemption every two years, making a house a very desirable investment.

Note - This new law is fairly liberal in terms of divorce, illness, and relocation- even what qualifies as a primary residence. Your clients should consult a tax advisor to make the most of the Taxpayer Relief Act of 1997.

THE TAXPAYER RELIEF ACT OF 1997

AND HOW IT APPLIES TO RESIDENTIAL REAL ESTATE

IN A NUTSHELL

Old rule - The tax on gains from the sale of a house were deferred if the home seller bought another house of equal or greater value.

New rule - The home seller no longer has to worry about buying a more expensive house to defer taxes on the gains from the sale of the house. Instead, a single homeowner is exempt from tax on capital gains up to $250,000 while a homeowner filing a joint tax return is exempt from up to $500,000 in capital gains.

Old rule - A homeowner 55 years of older was exempt from taxes on up to $125,000 in capital gains on the sale of a primary residence. This exemption could only be taken once in a lifetime.

New rule - The one-time, 55 and over ,capital gains exemption has been eliminated. Any homeowner can take advantage of the tax exemption on the sale of a primary residence if they have lived in the house for at least two years. They can take the exemption any time as long as the house has been their principal residence for two of the previous 5 years. The two-year limit may be waived in certain instances of job relocation or changes in health.

Old rule - Tax deferred retirement accounts are subject to a 10% penalty for early withdrawal.

New rule - Long - term capital gains must be held 18 months, but are taxed at a maximum of 20%- and could be as low as 10% at lower income levels. Tax rates will be reduced further on property held for more than 5 years after the year 2000.

This overview is for information purposes only. Property owners should consult with their tax advisors for specific details.