The new capital gains tax rules have provided wonderful tax breaks for those selling their home. The way the law previously read, a seller over the age of 55 was allowed a one-time gain of $125,000 on the sale of his or her house. Sales prices in excess of this amount were taxed at a roughly 28% rate.
Now, singles or couples filing are allowed to defer $250,000 in gain, tax-free ($500,000 for married couples). Sellers may take advantage of this tax-free gain law every two years, provided it had been the principle residence for these two years.
In addition, the home needs to have been the seller's primary residence for two of the last five years. Sellers over the age of 55 can take advantage of the new capital gains tax law as long as the property has been the primary residence for at least two of the last five years.
There is an approximate 20% tax on the difference over $250,000 ($500,000 for married couples). This stands in contrast to the previous tax law under which sellers were taxed at 28% after $125,000, and then the tax was only deferred if a home of equal or greater value was purchased.
Also, beginning in 1998, first-time home buyers are able to use up to $10,000 from an IRA account towards the down payment on a home purchase, without paying the standard penalty for early withdrawal. Any number of parents, children and other family members are also able to defer IRA withdrawal penalties, up to a combined total of $10,000 towards the down payment. Although penalties are waived, the taxes drawn on the withdrawn IRA funds are not waived.
For more information, visit the United States Internal Revenue Service.