For homeowners, the Taxpayer Relief Act is manna from Congress. In its simplest form, it exempts most home sales from all taxes. Owners of real property in Hawaii need to be careful because of the higher numbers involved with our real property. A number of side issues should be examined.
Married couples filing jointly can now exclude up to $500,000 of gain ($250,000 for individuals) on homes sold after May 6, 1997. The home must be your primary residence for at least two of the five years prior to selling it. This replaces the old two year roll over rule and the $125,000 exclusion. Under the old rules, you had to be 55 or older. The new law removes any age requirement.
If you have not lived in the home for two of the five preceding years, you may be allowed a partial exemption under special circumstances. These include change of employment, a change of health status, or unforeseen circumstances. You must keep in mind that the IRS will no doubt come up with its own definition of unforeseen circumstances.
There is further good news. The capital gain tax has been reduced to 20%. If the home is owned at least five years after the year 2000, under the new special rules the 20% rate could go down to 18%. Note that if you take a loss on your home sale, the government still has no pity on you. Losses remain non-deductible.
If a gain exceeds the exemption limits and if you sold your home after May 6, 1997, you can still use the old two year exemption of rolling over the gain into a house that costs as much or more, if you sold or had a binding contract to sell before the date of enactment, August 5, 1997.
You should maintain good records of your home improvements. If your gain is more that $500,000 ($250,000 if single), you can use home improvements you made over the years to offset the remaining gain after exclusion amounts have been exhausted.
As with all tax matters, you should check with your tax advisor before you act.