What used to be a once-in a-lifetime, tax-free $125,000 exclusion from capital gains has been eliminated.This capital gains change will alter the incentive structure for a large part of the economy. It allows homeowners who sell their principle residence up to $500,000 in tax-free capital gains every two years; reinvesting the proceeds into a new residence to claim the exclusion is no longer required. The only requirement is that the seller use the home as his principle residence for a period of 2 years out of the last five years prior to the sale. That means most homeowners will not have to pay tax on profit from the sale of their home or have to undergo complicated documentation of expenses to satisfy the IRS. Tax-sheltering profits is an important key to financial success.This new incentive should increase the demand for real estate for years to come.
The new law also encourages the long-term possession of high-ticket real estate as well as other capital assets. According to the Senate Budget Committee and the August 1997 Special Report from the IRS, tax rates on capital gains range from 8% to 20%, depending on income. Top rates are 20% for investments held for at least 18 months (12 months if sold before July 29, 1997); 10% for assets bought after the year 2000 and held at least five years. The top rates for joint filers with incomes under $41,200 are 10% for 18-month assets, 8% for 5-year assets.The advantages of this new law:
It allows primary residence real estate to be bought and sold any number of times tax-free within the allotted $500,000 threshold. One can leverage his primary residence; most homeowners do it by taking on a mortgage. Investing in higher-leveraged, higher-priced homes allows the potential for greater tax-free appreciation. Because of leverage, your home should appreciate faster than money left in a 401K or similar investment program. If you invested similarly in a commodity using margins say at 5:1 or 10:1 ratios, you may not sleep as well. A home-equity line of credit may be established with the possibility of interest payments being deductible. Try doing this against your mutual fund portfolio for a favorable line of interest.
It increases demand to own real estate. With a rising real estate market,
the trend for rolling over gains from lower-priced homes into higher-priced
homes should ensue. Increased demand for housing should also cause prices
to climb. The incentive to be invested in real estate should continue to have
a sustained upward influence on the residential housing market.
Greater deductions for mortgage expenses lower your federal income tax bite.
Taking advantage of possible increased capital gains in a rising market along
with the desire to move up to a better house or a better neighborhood may
incur a large mortgage. The larger the mortgage, the bigger the federal income
tax deduction and the less you don't have to pay in federal taxes at the end
of the year. Comparing this to the flip side, you can't deduct contributions
to your mutual fund or other investments on your federal income tax.
The new tax bill also reaches out to your heirs. Estate tax exemptions have
been raised up to 1.3 million for family farms and businesses in 1998. For
other estates, the exemption will rise to $1 million by the year 2007 allowing
for a virtual tax-free gift to one's heirs.Your castle is a prime, tax-sheltered
investment. As the implications of this legislation catch on, the demand
for real estate should increase.
