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Buying a new home is one of
the smartest purchases you can ever make. One of the reasons is that homeownership
has many positive tax implications. Because of changes to the tax code
passed in 1997, these tax implications are much more favorable for most
home owners today than in the past.
According to the law, married home owners do not have to pay taxes on
up to $500,000 in capital gains realized on the sale of their homes. The
$500,000 provision applies to married home owners filing joint returns
and is restricted to homes sold on or after May 7, 1997. To qualify, the
home would have to have been used as a principal residence for at least
two of the previous five years. Taxpayers who file individual returns
may claim up to $250,000.
According to the previous rules, the tax on any profit would be deferred
if the sellers of the home bought and occupied another home of equal or
greater purchase price within 24 months before or 24 months after the
sale of the old residence.
The previous law also allowed for a one-time capital gains exclusion.
Home sellers who were at least 55 years old could realize a tax-free gain
of up to $125,000 if the home had been used as a principal residence for
at least three of the previous five years.
Under the old law, home sellers could use their capital gains exclusion
only once after turning 55. Under the new law, people over 55 who have
already used their exclusion can take advantage of the new tax provisions,
assuming that they have occupied their new residence for at least two
of the previous five years.
First-time buyers also benefited from a special provision of the new
tax law. One of the largest obstacles to homeownership usually is the
inability of potential first-time buyers to save enough money for a downpayment.
In 1997, Congress passed a new provision allowing first-time buyers to
withdraw up to $10,000 from their IRA accounts if the money is used for
a downpayment on a home. The penalty-free provision can be applied to
IRAs owned by the buyers, their parents or their grandparents. Under current
law, early withdrawals from an IRA incur a 10 percent penalty.
Source: NAHB
Copyright © 2002 Merle Schneider
All rights reserved
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