Details of Capital Gains Cuts Emerge

Important new details about the scope and timing of President Clinton’s proposed elimination of capital gains taxation for most home sales have emerged in the administration’s fiscal 1998 budget submission to Congress.

As promised at last year’s Democratic National Convention, Clinton called for revision of the federal tax code to allow married taxpayers filing jointly to exclude up to $500,000 of profits on the sale of a principal residence. Single taxpayers, heads of households and married persons filing separately could exclude up to $250,000.

For the first time, however, the administration provided technical detail defining how and when homeowners could begin using the proposed radical changes to the capital gains rules.

Here’s a quick overview of what the president sent to House and Senate tax-writers.

One of the key questions raised by taxpayers and legislators about the capital gains proposals has been the date upon which they would take effect.

In response, the president asked Congress to make the $250,000-$500,000 exclusions “available for all sales of homes occurring on or after Jan. 1, 1997.” He also proposed permitting taxpayers who sell homes between Jan. 1, 1997, and the date of enactment of the tax law--months down the road--to choose between either the revised capital gains rules or the long-standing current rules.

Most home sellers probably would opt for the new, simplified rules. But some would not.

For example, a single taxpayer with a capital gain of $350,000 on her home--$100,000 over the $250,000 limit--might want to use the current tax-deferred “rollover” election and avoid taxes, rather than pay a capital gain levy on the $100,000 above maximum.

So, too, might a married couple with a gain in excess of the $500,000 tax-free limit. Why pay taxes when you can roll them over?

Another key detail provided in the budget documents: eligibility standards governing who does or does not qualify for the new exclusion. To qualify, “[t]axpayers generally must have owned a home and occupied it as their principal residence for at least two years during the five years prior to the sale of the residence.”

That means that if you bought a home in February 1992, lived in it through 1994 but then were relocated overseas by your employer and rented it out, the home could still qualify as a principal residence under the revised law if you sold it in January 1997.

As a general rule, the new exclusions would be available to taxpayers only once every two years. But for homeowners “forced to move” without meeting the two-year requirement because of “medical reasons or a change in place of employment,” there would be a loophole:

They could still get a shot at taking a sizable tax-free exclusion, “but the maximum . . . would be the $500,000 (or $250,000) exclusion times the fraction of the two-year residency requirement that has been satisfied.”

Say, for example, that a medical crisis forced you as a single taxpayer to sell your home 18 months after you bought it, and you faced a $100,000 capital gain at sale. Under the new formula, even though you didn’t occupy the home as a principal residence for two years, you could still exclude 75% of your gain (18 months divided by 24 months) from capital gains taxes.

The proposal also deals with situations involving separation, divorce and marriage. In the case of separated spouses filing taxes jointly but not sharing a principal residence, a $250,000 maximum tax-free exclusion could be taken by either spouse on a qualifying sale of his or her principal residence.

Similarly, if a taxpayer who hasn’t used the exclusion marries someone who has used it during the last two years, the rule would allow the newly married couple to exclude up to $250,000 of gain on the sale of their home. After two years of marriage and joint residence, that figure would jump to a maximum $500,000.

Other points covered in the president’s detailed proposal:

* Once enacted, the new capital gains system would scrap and replace the rollover rules, as well as the $125,000 onetime exclusion for sellers 55 and older. Say goodbye to all those mind-numbing computations of your tax “basis” and the pressure to buy progressively more expensive homes.

* If you use a portion of your home for either rental or business use after Dec. 31, 1996, you will have to reduce the amount of gain excluded from taxation by the depreciation attributable to the space in the home used for nonresidential purposes.

What’s the immediate outlook for all this in Congress?

One of the top tax legislative analysts on Capitol Hill, Kenneth J. Kies, chief of staff of the congressional Joint Committee on Taxation, said in a recent interview that if any major tax bill moves in Congress this year, “this [home seller capital gains plan] will be part of it” in some version.

Kies’ most optimistic schedule for passage: by the August recess. Otherwise, figure on enactment in the fall.

Distributed by the Washington Post Writers Group.