1997 Tax Changes: Capital Gains Tax and Sale of a Primary Residence

In 1997, President Clinton signed a new tax law that changed how capital gains are taxed for individuals. For example, if a couple named Sam and Sally Smith decide to sell some stocks and other assets, they need to consider these new rules to figure out the best time to sell. Under the old rules, the length of time they owned an asset determined how much tax they would owe on any profit from selling it. But the new law changed the rates and the timing rules, so they need to talk to a tax expert to understand how it affects them. In 1997, Congress changed the rules for how capital gains tax is calculated. There are now three holding periods: short term (not more than one year), midterm (more than one year but not more than 18 months), and long term (more than 18 months). The tax rates for these holding periods also changed. Short-term gains are taxed at regular income tax rates (up to 39.6%), midterm gains at 28%, and long-term gains at 20% or possibly 10% depending on your tax bracket. The Smiths asked how these new rates would apply to their assets, with $250,000 in income in 1997 and $30,000 in 1998. The Smiths sold some stocks, a stamp collection, an apartment building, and some small business stock. The tax rates for the different sales varied depending on how long they owned the property. The stocks had different tax rates, and the stamp collection was taxed at an older, higher rate. The apartment building had a mix of tax rates for different parts of the sale. Their effective tax rate for the year was 15 percent. The Smiths can sell up to $100,000 worth of stock and still be taxed at the lower 10 percent rate. If they sell more than that, some of the money will be taxed at the higher 20 percent rate. The Johnsons sold a house in the past and used a one-time tax exclusion, so now they need to pay capital gains tax on the sale of their current house unless they buy a new one of equal or greater value. The tax attorney explained that the rules for selling a primary residence have changed. Under the old rules, the Johnsons didn’t have to pay taxes on the sale if they bought a new house of equal or greater value within 24 months before or after selling their old one. But now, they can exclude up to $500,000 of taxable gain on the sale of their home. To qualify, they must have owned the home for at least two years out of the five years before selling, used it as their primary residence for at least two years, and not have sold another primary residence within two years of selling their current one. The Johnsons can choose to use the old tax rules or the new ones when they sell their house. If they sold it during a specific time period in 1997, they can use the old rules, which would result in them having to pay taxes on their gains. However, if they use the new rules, they can exclude some of the gain from their taxes, resulting in a lower tax bill.

In another example, Ted and Susan Green want to sell their house and buy a new one. They think they won’t have to pay any taxes on their gains, but they should talk to a tax expert to make sure. The Taxpayer Relief Act of 1997 has new rules for selling a home without paying a lot of taxes. It’s important to keep good records to qualify. Some people can exclude up to $250,000 in gains from selling their home, but they have to meet certain requirements. The new rules can be complicated, so it’s important to pay attention to when the home was bought, how long it was owned, and what needs to be done to get a good tax deal. The Internal Revenue Code of 1986 (as amended) determines the tax rules for different types of taxpayers, such as individuals, partnerships, and trusts. It defines capital assets and specifies what is not considered a capital asset. Different sections of the code and tax rates apply to different types of assets and situations. For example, selling a home may qualify for a tax-free rollover if certain conditions are met. There are also specific rules for selling stocks and other investments. Benjamin A. Jablow is a tax attorney who specializes in helping people with these complex tax laws. TL;dr: This article is from the Tax Law Section and is about promoting duty and service to the public, improving how justice is carried out, and advancing the study of law. It’s like a club for lawyers who want to help people and make the legal system better.

Source: https://www.floridabar.org/the-florida-bar-journal/1997-tax-changes-capital-gains-tax-and-sale-of-a-primary-residence/