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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.
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