Don’t Count on Home Sale Tax Relief Just Yet
If you assume that capital gains tax relief for homeowners is a slam dunk as of Jan. 1, 1997, because President Clinton and former Sen. Bob Dole both campaigned for it, think again.
Tax experts on Capitol Hill warn that homeowners who try to factor the proposed generous federal capital gains law changes into their upcoming real estate sales or purchases are rolling the dice and could needlessly lose thousands of dollars if they guess wrong.
Not only is the effective date of Jan. 1 in doubt, said one top tax committee staff
member, but “so are many of the substantive details” of the proposals. To make sure you have a solid grasp of the proposals and their current status, here’s a quick update.
First, the candidates’ campaign plans: Last summer, both Clinton and Dole called for a sweeping simplification of the tax code’s complex system of accounting for--and taxing--profits realized by sellers of homes. Both would eliminate the requirement of “rolling over” the profits from a home sale into the purchase of a home of equal or greater cost in order to defer recognition of the taxable gain.
Both would also eliminate the $125,000 one-time exclusion on gains for home sellers 55 years of age or older.
Under the Clinton plan, a married couple of any age who have owned and occupied their principal residence for two years could shelter as much as $500,000 in gains from federal taxation. Singles could exclude up to $250,000. Only the tiny fraction of home sellers who experience gains over these thresholds would have to contend with capital gains taxation on the unsheltered remainder of their profits.
Dole’s proposal would require sellers to own and live in their principal residence for three of the preceding five years. Married couples of any age could shelter up to $250,000 in profits, singles up to $125,000. Couples living in their homes for 10 years could exclude $25,000 per year more after that, up to a maximum $500,000 for couples who had owned and occupied a principal residence for 20 years. Singles would get a $12,500 per year add-on after 10 years, for a maximum exclusion of $250,000.
Neither plan would limit the number of times that owners could use the tax-free provision during their lifetimes. In effect, for the vast majority of sellers, profits on all home sales could go straight into their pockets, rather than be shared with the federal government.
Widely publicized during the presidential campaign, the mere existence of the two reform packages has “not only excited a lot of [homeowners],” in the words of one congressional staff member, “but has also led to some serious misinformation” about when and how they’ll be implemented.
Tops on the misinformation list: that all home sale transactions on or after Jan. 1 will be covered retroactively by the law changes, once Congress passes tax legislation incorporating the proposals. That’s not necessarily the case.
Relatively noncontroversial tax proposals with bipartisan support don’t always sail through Congress with their original effective dates. The homeownership tax-relief plank, in fact, is popular enough for it to end up being held hostage for months, says one staff expert, while Democrats and Republicans haggle over much larger issues, such as a balanced budget or a capital gains cut for personal and corporate investment assets.
If that happens, action on a comprehensive tax bill with a capital gains cut for homeowners could be delayed until late summer or the fall. That, in turn, would put pressure on lawmakers to roll back the effective date from Jan. 1, 1997, to some later date, perhaps the date of enactment. In that case, home-sale transactions completed before that date would be covered by the current rules. Sellers who assumed they’d be tax-free on a $300,000 gain with no rollover into a more costly dwelling, for example, would face a 28% capital gains rate instead.
Another problem: Both the Clinton and Dole proposals were crafted in the heat of a presidential campaign. Once in the hands of legislative technicians from Capitol Hill, the Treasury Department and the IRS, the details of the plans could change significantly.
How much will the maximum basic tax-free exclusion be--$500,000 or $250,000? How long would you have to live in the dwelling to qualify for the maximum exclusion? Two years? Three years? Twenty?
What about indexing of capital gains to eliminate inflation as part of the profit computation, as proposed by Dole? And what documentation would taxpayers need to demonstrate their gains on sales?
The bottom line: With so many issues unresolved--to say nothing of the effective date--don’t commit yourself to any course of action based on either the Clinton or Dole plans. Until the House Ways and Means Committee endorses homeowner tax-relief legislation, assume the campaign’s ballyhooed reforms don’t exist. Because they don’t.
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Distributed by the Washington Post Writers Group.
