New Income Tax Reform Bill Eliminates Hit For Selling Home

What do you suppose caused Ronald and Gail Dueck of San Diego to move out of their home and swap places with the people who were renting another house the Duecks owned?

Answer: a new tax law.

Last year’s mammoth tax bill allows homeowners to sell property they’ve held for years without suffering a big tax hit. That’s because of new capital gains rules that give couples a tax exemption on the first $500,000 in profit from the sale of their home.

The old rules had allowed sellers to defer taxes on proceeds of a home sale by acquiring another home of equal or greater value.

The Duecks’ rental property had accumulated substantial equity as they “traded up” from various houses since 1976. If they sold the rental under the old law, they would have faced a $120,000 tax bill on that accumulated equity if they hadn’t rolled those proceeds over into a bigger home.

But once the Duecks have lived in their rental home for two years, they will be able to sell the property and qualify for the $500,000 tax exclusion under the new law. The law also gives singles a $250,000 exemption for home sales after May 6, 1997. This break can be used once every two years.

“It’s been tremendous what’s happening here. It’s kind of money from heaven,” said Gail Dueck, a nurse. “This new tax law is a sweet deal.”

Changes in the capital gains rules also give elderly people new freedom to sell their homes without facing a tax bite.

“A lot of Americans have known for years their choice of where they live isn’t free,” said David L. Gorsich, a tax specialist in San Diego. “It also revolves around tax considerations.”

The major change from old law is elimination of a one-time $125,000 exemption for people age 55 and over.

Significantly, the new law doesn’t require people to buy more expensive houses in order to defer taxes from sale of their existing home.

In doing so, the new law permits people to sell their home and move to a less expensive area of the country or to a smaller residence, such as a condominium.

Gorsich said this has opened up a variety of opportunities. Some workers may consider moving from California, for example, to take a job in the Midwest because housing taxes won’t be a factor any longer.

“I’ve seen people turn down stepping stones in their career because they would have to sell their home,” Gorsich said. “I see this as removing tremendous restraints on society.”

Older couples could benefit greatly. Gorsich said he knows of older couples living in homes that have substantially increased in value over the years. They would like to move out to a smaller condominium where maintenance wouldn’t be such a problem, but they refuse because of tax considerations.

Officials with the National Association of Realtors said they’ve detected activity in their national home sales statistics but say it’s difficult to measure.

The group expected sales of existing homes to total 4.3 million in 1997, an increase of about 5 percent from 1996 levels, while 1998 sales are expected to drop to 4.09 million existing homes. “There may be some increase in the volume of sales, but it’s not enough to make a significant percentage gain,” said NAR spokesman Walter Moloney.

To be eligible for this break, a taxpayer must have made the home the principal residence for at least two years during the five years before the sale.

The new law should simplify paperwork for homeowners.

To minimize their tax, homeowners in the past kept detailed records on home improvements - ranging from roof repairs to bathroom remodeling - to document a step-up in the home’s value - which tax lawyers call “basis.” A higher basis reduces the size of the taxable profit.