The major change to the Capital Gains Tax in 1997 was the rate. Effective for sales after May 6, 1997, the long-term capital gains tax rate for individuals, estates and trusts was reduced to 20% (from 28% for sales prior to this change). The long-term holding period remains 12 months.
For taxpayers in the lowest tax bracket (15%), long term capital gains are taxed at only 10%, effective for sales after May 6, 1997.
The following summarizes the current Capital Gains Tax Rules. These became law in 1997.
| Long-Term (more than 12 months (1 year)) | 20% (10% if in 15% tax bracket) |
| Short-Term (less than 1 year) | Ordinary Income Tax Rate |
There are some exceptions to these changes. The following assets are not eligible for the new maximum rates.
IMPACT OF CAPITAL GAINS CHANGES
Taxpayers holding capital assets may need to evaluate when to sell those assets. Keep in mind that capital losses after offset with capital gains cannot exceed $3000 in any year. Any excess is carried forward to future years, but cannot be used to exceed the $3,000 loss ceiling. For more information, contact your financial planner, tax advisor or Maxwell Shmerler & Company for a detailed analysis of your position.
Homeowners may now exclude up to $500,000 in gain from the sale of a principal residence regardless of age ($250,000 for single taxpayers). This differs greatly from the old law that included deferral rules and provided a one-time exclusion of up to $125,000 for taxpayers over the age of 55. This new exclusion applies if you have owned and used the home as a principal residence for at least 2 of the 5 years before the sale. In general, this exclusion can only be used every two years. Under certain circumstances, a prorated amount will be excluded if the home was used as a primary residence for less than two years.
The 2 out of 5 year rule does not require the same 2 years be spent owning and living in the residence. For example, in 1996 and 1997 you lived in the home as a renter, as you did not own the home. In 1998, you bought the home but moved out that year. In 2001, you sell the home. You lived in the home 2 years since 1996 and owned it for 2 years since 1996, but not the same 2 years. You still may qualify for the full exclusion (other criteria must also be met).
For more information, please contact your tax advisor or Maxwell Shmerler & Company for more details.
The IRS has recently released important details on homesale gain exclusions. These include clarification of rules allowing partial exclusion for homeowners that do not meet 2 year residence minimum. Click HERE for the these details.
IMPACT OF CHANGES ON SALE OF PRINCIPAL RESIDENCE GAINS
Most homeowners will benefit from this change because they are not forced to trade up in order to obtain a deferral of gains. Almost everyone is relieved of the burden of keeping paperwork on improvements that add to the basis of the property.
For those with gains over $500,000, the changes are not as favorable since gains over this amount will be taxed at the capital gains rate that applies. The previous law allowed deferral of gains under certain circumstances.