Did the Taxpayer Relief Act of 1997 include any tax relief for you? It may have if you are a homeowner or someone wanting to purchase your first home.
The new law is living up to its name for first-time homeowners get a break by being able to take penalty-free withdrawals from their individual retirement accounts or IRAs up to $10,000. This can make a huge difference in being able to make a down payment on a first home.For many young families, making a down payment is a tougher hurdle than affording the monthly payments.
More relief comes for current homeowners, especially those who like to buy and sell homes. If you remember the old rules, they weren't very flexible. Selling a primary residence meant you'd have to buy another residence of greater value within two years or be subject to capital gains tax on the appreciation of your home. This became a vicious cycle. In order to continue deferring the taxes, homeowners would have to keep buying bigger and more expensive homes. If they moved from a from a high-cost-of-living city to one more affordable, they could find a suitable house at a lower price but that meant they had to pay the capital gains tax they'd been deferring over the years.
Now, individuals can exclude up to $250,000 in capital gains tax on the sale of a primary residence. Married couples filing jointly can exclude $500,000 from taxes. That's significant. This means that married couples just got a tax exclusion increase of up to $375,000. What's more, this is not a one-time exclusion after age 55. The exclusion can be used once every two years. And the next home purchase does not need to be of higher value than the previous home.
The owner must simply have used the property as a principal residence for at least two years out of the last five years preceding the sale of the home. A pro-rated exclusion is available for taxpayers who fail to meet the two-year requirement due to a change of employment, health concerns, or other unforeseen circumstances.
The marriage penalty has also been eliminated. Previously, if you married someone who had already used his or her exclusion, then you would lose your right to take an exclusion. Now a single individual who marries someone who has used the exclusion within two years prior to marriage would still be allowed a $250,000 exclusion.
As you can see, there are many people who can benefit from these new rules. People who like to move around the country or around their local community will be more at liberty to do so. Their tax savings will only increase the more they move around. And the elimination of the need to trade up to a higher-priced home each time will put many people at ease.
Retirees will especially appreciate the new changes. Many of them have an empty nest and may be tired of keeping up a large home.