NCPA - National Center for Policy Analysis

New Tax Law Launches Careers for Home Buyers and Sellers

April 1, 2003

Changes in the tax law in 1997 allowed certain taxpayers to sell their primary residences without paying capital gains on the profits. Under the previous law, homeowners had to plow any profits from the sale of a previous home into another residence of equal or greater value to escape capital gains taxes.

The changes in the law, combined with historically low interest rates and escalating residential real estate values, have encouraged people to buy and sell homes -- trading up for fun and profit.

While the laws have been relaxed, there are still some rules which must be observed, lest capital gains come into play.

  • The maximum profit now exempt from taxes is $250,000 for sellers who are single and $500,000 for married couples filing joint returns.
  • To qualify, one must own and use a property as a principal residence for two years of the five years preceding the sale.
  • Under the previous law, those who traded down or became renters received a one-time-only $125,000 exemption at age 55 -- but otherwise had to pay tax on all their profits.

Real estate experts say many people have become serial buyers and sellers because they became disillusioned by stock investments. Economists say they have noticed this trend, but that effects on the overall real estate market have been difficult to track.

Source: Jennifer Bayot and Daniel Altman, "Tax Law Is Leading to Some Serial Home-Buying," March 30, 2003, New York Times.


Browse more articles on Tax and Spending Issues