Selling House And Capital Gains – The Over-55 Home Sale Exemption was a tax law that gave homeowners over 55 a one-time capital gains exclusion. Individuals who met the requirements could exclude up to $125,000 in capital gains from the sale of their personal residences.
The over-55 home sale exemption has not been in place since 1997. The exemption was intended to stimulate the real estate market and reward homeowners for buying and then selling their homes. It has been replaced by other exclusions for all who profit from the sale of their principal residence, regardless of age.
Selling House And Capital Gains
The Over 55 Home Sale Exemption was introduced to give homeowners some relief from the tax consequences of selling their homes. The exemption no longer exists as it was replaced by new rules when the Taxpayer Relief Act of 1997 was ratified into law. This law was one of the largest tax cut laws implemented by the United States government.
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Under the old rule, qualified taxpayers could avoid paying taxes on the sale of their homes, provided it was a primary residence. Taxpayers who took the over-55 home sale exemption would file Form 2119 with the Internal Revenue Service (IRS). The form was used even if the taxpayer deferred all or part of the profit to another tax year. Taxpayers were required to report losses that resulted from the sale of their home on Form 2119. However, according to the IRS, taxpayers could not deduct the loss from their tax burden.
At the time, door-to-door sellers had an alternative to being exempt. To avoid paying taxes, the sellers could use the proceeds from the sale within two years to buy a more expensive home.
When the exemption was in effect, there were several criteria for homeowners to qualify. The seller or at least one owner of the property had to be over 55 years old on the day the house was sold. For married couples, only one of the spouses was required to meet this deadline. In order for the exemption to apply, this spouse must also have been the owner of the property right on the date of the transfer of the property right. Only one exemption was allowed per married couple, which would prevent one spouse claiming the exemption on one sale and the other spouse claiming on a later sale.
But there was a gap. If the primary home was jointly owned by two or more unmarried persons, it was possible for multiple title holders of the relevant age to apply to the exemption. For the home to qualify, the owner must have owned and used the property as a principal residence for at least three of the five years immediately preceding the sale of the home. There were personal contributions for time spent on vacation or for medical care.
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Prior to 1997, in order for the seller or at least one titleholder to obtain an exemption, they had to be 55 or over on the date of the sale to apply.
With the passage of the Taxpayer Relief Act of 1997, the new home sales tax burden was eased for millions of resident taxpayers, regardless of age. Rollovers or once-in-a-lifetime options similar to the over-55 home sale exemption have been replaced with new sale exclusion amounts.
Homeowners may be eligible to exclude all or part of the gains made from the sale of their principal residence from their income. The law raised the amount of excluded gain to $250,000 per taxpayer or $500,000 for a married couple filing a joint return. The law also allowed for more than one exclusion per taxpayer per lifetime. However, the taxpayer cannot exclude gain from the resale of the home during the two-year period ending on the date of sale.
After 1997, homeowners are required to pass the ownership and occupancy tests to qualify for these exemptions. To meet the ownership test, taxpayers must own the home for at least two years. The use test, on the other hand, requires sellers to have lived in the household as their principal residence for at least two years. Both tests must be met within a five-year period before the date of sale. Homeowners who use their homes for business or rental income may also be eligible. Must pass home ownership tests and use as well.
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For example, if an individual bought a property in 2000 and lived in it until 2001. The owner then rented the property for the following two years. The owner decided to move after the tenant left and lived here until 2005. The owner then sold the property. In this case, the owner may still qualify for the exemption because the property was used as a primary residence for at least two of the five years preceding the sale.
Prior to the passage of the Taxpayer Relief Act of 1997, eligible homeowners age 55 and older did not have to pay taxes on the sale of their principal home. When the law passed, it removed the age requirement from the home sale exemption.
Seniors, along with anyone else, can get a tax exemption on the amount of money they make from selling their home if they meet specific criteria, such as owning and living in their home for two years prior to the sale.
The Taxpayer Relief Act of 1997 was ratified and contained various tax breaks to help stimulate the US economy. Among the items were reduced tax rates and tax credits like Roth IRAs and child tax credits.
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By clicking the “Accept all cookies” button, you agree to the storage of cookies on your device to improve website navigation, analyze website usage and support our marketing efforts. If something you own increases in value and you sell it, then I have made a profit. This gain is called a capital gain and capital gains tax is the tax you may owe on this gain.
This tax is not just for wealthy investors. Anything of value sold for profit can be taxed – whether it’s jewelry, a car, or your nerdy friend’s comic book collection.
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Capital gains tax can apply to anything that has value, even if you don’t consider it an investment. Specifically, the tax often applies to:
To find out if you owe taxes on the sale, you must first find out what is called the cost basis of the item being sold. The price is based on the amount you paid for the item – but usually also includes taxes, shipping, and any improvements you’ve made to the item (like adding new floors to a house or putting an extra gem in a ring).
If you sold the item for more than your cost, you have a capital gain. In this case, you usually have to report the gain on your tax return and may owe tax on the gain.
If you sold the item for less than your cost, you have a capital loss. Although no one likes to lose money, the advantage of a capital loss is that you can use it to reduce your taxes – offsetting any capital gains you have from other recent sales.
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“I am proud to pay taxes in the United States. Only thing is – for half the money I could be just as proud.” – Arthur Godfrey
What tax rate is applied depends on how long you have owned the asset. You generally pay a lower tax rate on gains on items you own for more than a year:
There is an important exception to this rule. Long-term gains from the sale of so-called ‘collectibles’ – such as stamps, jewelery or antiques – are generally taxed at your ordinary income tax rate up to a maximum rate of 28%.
Tax rates change frequently. The exact rate that applies to a particular sale depends on the rate in effect for that tax year. If ever in doubt, consult the IRS website or an accountant!
Capital Gains Tax On A Home Sale, Property Or Real Estate (and How To Avoid)
For many people, the most expensive asset they own is their home. Whether you live in it or own investment property, any sale can result in capital gains tax. However, special rules apply to real estate:
You may owe capital gains tax whenever you make a profit on the sale of an asset. It’s calculated by finding the capital gain (the difference between the purchase price and what you sold it for) and how long you’ve held the asset. Usually, the longer you own the item, the lower the tax rate. There are special rules for selling real estate that can help you avoid tax or reduce the amount you owe.
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