The children are grown. The house is too large. You would like to help with a college education or downsize for relaxation and recreation. It may be time to investigate the Capital Gains Tax Relief. The 1997 tax law made revolutionary changes in the tax treatment of the sale of a personal residence. This bill (1) eliminated the old “roll over” of gain provision, and (2) replaced the $125,000 exclusion for taxpayers over age 55, with a $250,000 exclusion, or $500,000 for taxpayers filing a joint return. The new exclusion does not impose any age restrictions, so any seller is eligible. You now can claim this exclusion every 2 years, and you do not have to buy a new residence. The new law short-changed widows and widowers, however. It forces surviving spouses to sell their homes within the same tax year that their spouse dies in order to receive the full capital gains exclusion of $500,000. Widows and widowers whose gains would exceed $250,000 could be faced with losing their full tax benefits if they delay their selling decisions.

Q&A:

Q. I already used the one-time $125,000 exclusion for a residence I sold before May 7, 1997. Can I still claim this new exclusion?

Yes. Your eligibility for the new $500,000 exclusion is not affected by whether or not you claimed the old $125,000.

Q. My brother, one of his friends, and myself own a home together that we use as our principal residence. Each of us is single. How will the new exclusion affect us when we sell the residence?

Each of you will qualify for an exclusion up to $250,000. Thus, as much as $750,000 of gain on the sale could be excluded from tax. Please note that your individual status tax law might differ from the federal provision, and as with all tax issues related to the transaction, guidance from a competent tax advisor is essential.

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