NCPA - National Center for Policy Analysis

Taxpayers Benefiting From New Home Sale Tax Rules

December 4, 2000

In 1997, Congress changed the tax rules governing home sales. Sellers were suddenly able to reap tax-free capital gains of up to $500,000 per couple -- or $250,000 for singles -- on the sale of a primary home.

Since the exclusion can be claimed as often as every two years, the more nomadic among us are realizing tidy profits as they move from house to house, pocketing a little appreciation every time.

The new rules are introducing changes in real estate markets.

  • The National Association of Realtors credits the 10 percent rise in single-family second-home sales since 1997 to owners' new freedom to trade down and use their profits to buy second homes.
  • People who are good at remodeling have found they can make a steady tax-free income averaging $250,000 a year by fixing up mansions while living in them.
  • Realtors are advising young couples to start by buying a residence in an up-and-coming neighborhood and sell it at a profit in two years.
  • People contemplating a divorce would be better off to sell their house and take advantage of the $500,000 exclusion for couples before legally breaking up.

If a spouse dies, the survivor has only until the end of the calendar year to sell and take advantage of the full exemption. Tax experts say that if the surviving spouse waits, he or she gets to lift the house's cost basis part way or all the way to current market levels -- depending on the state -- and that may be the better deal. The survivor can then use the $250,000 exclusion on the remaining gain, if any.

Source: Nathan Vardi, "Serial Homesteading," Forbes, December 11, 2000.


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