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Retirees can avoid tax in selling their homes

Posted online

by Richard A. Hale

for the Business Journal

The Taxpayer Relief Act of 1997 has some nice tax breaks for growing families, such as child credits, college savings accounts and credits and incentives to save for retirement. But what will it do for retirees?

Aside from making our tax forms for 1997 more complicated, the tax law does give the more mature crowd some relief. Here are some general changes that may mean lower taxes for you.

?Selling your house can buy you more. There are new tax exemptions for capital gains on selling your principal residence. The first $500,000 in profit for joint tax returns and $250,000 for single taxpayers is now exempt from any capital gains tax.

It used to be that Americans could defer taxes on the sale of a home if they bought another one within 24 months that cost the same or more than the last one, including home improvements. Or, if we could wait until age 55, we'd get a one-time exclusion of $125,000 in capital gains when selling a home at a profit.

May 7, 1997, the $125,000 exclusion at age 55 went away, and so did the chance to defer any taxes by buying a more expensive home (although some transition rules apply for transactions through Aug. 5, 1997, the date the law was signed).

So, home sale profits of more than $500,000 for a joint return will be subject to capital gains tax. To qualify for the new exemption, you must have used your house as a principal residence for two of the last five years. People can generally use the exemption once every two years.

What does that mean for older Americans? A chance to scale down, tax-free, even if the one-time exclusion at age 55 was already used in a home sale years ago. Let's say you now own a paid-up home worth $180,000, but you want a place with less lawn or no lawn. Selling your $180,000 house and buying a smaller house at $90,000 can mean $90,000 for your retirement fund or a vacation home.

?Now you can sell those long-held assets. If you've been waiting to see what Congress would do about capital gains before you sold an appreciated investment you didn't want to hold anymore, here's your chance to take advantage of a new tax rate. In the past, any profit from an asset you sold was taxed at a maximum rate of 28 percent if that asset was held for more than 12 months what the IRS calls "long term."

Now the profit is taxed at just 10 percent if you're in the 15 percent tax bracket, and at 20 percent for other tax brackets. There's a catch, however you must hold the asset for more than 18 months.

If you're thinking of selling artwork, antiques or other collectibles to take advantage of this new tax rate, there's another catch sales on collectibles like this still will be taxed at a maximum 28 percent.

?Estate tax exemptions will increase. Since 1987, the value of assets in an estate that was not subject to estate taxation was $600,000. That value rises to $625,000 in 1998, and gradually increases to $1 million by the year 2006. For farm families and other family-owned businesses that qualify, the amount not subject to estate taxation is $1.3 million.

The rules for this are complex, including the stipulation that the business must make up more than half the estate, and a family member must participate in the business for 10 years after inheriting it.

?Now there's no 15 percent accumulation tax nor excise tax on big payouts from tax-advantaged retirement accounts. Retirement distributions from 401(k)s or other qualified retirement accounts, like IRAs, are still subject to income tax when you receive them, but now there's no extra 15 percent tax on payouts over $160,000 a year.

That excise tax, sometimes called the "success tax," has been repealed, as has the 15 percent tax on certain large amounts accumulated in those kinds of accounts in estates.

Your financial adviser can tell you more about general points in the new tax law and how it affects people who are retired. Of course, to see how these topics apply to your individual tax situation, see your tax accountant.

(Richard A. Hale, CFP, is a financial advisor with American Express Financial Advisors Inc.)

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