Effective May 7, 1997, married couples filing jointly are permitted to exclude $500,000 from taxable capital gain resulting from the sale of their principal residence. Single filers and those who are married but file separately, may exclude $250,000 from taxable capital gain. This exclusion is available every two years. Any gain in excess of the exclusion is taxable.
To qualify for the exclusion certain conditions must be met. The taxpayer must have owned and used the real estate as a principal residence for at least two of the last five years. Taxpayers who must sell prior to meeting this holding requirement due to job changes, health, or other "unforeseen circumstances" may qualify for a reduced exclusion. "Unforeseen circumstances" may be clarified in the future by further Treasury Department regulations.
Divorced couples and those
who are separated may also take advantage of the new
tax law. Couples meeting the two following rules can
each exclude up to $250,000 of capital gain:
If they fail to meet these requirements both must meet the 2 of 5 years
rule in order for each to qualify for the $250,000
exclusion.
Most homeowners win because they now have the option of trading down, or selling and renting a new place to live, tax-free. However, those with more than
the allowed limits in gain may not find the new rules as favorable (primarily those who have lived in now high-priced homes for many years).
