Tax Advantages Of A New Home

A new home is one of the smartest purchases you can ever make. One of the biggest reasons for this is that home ownership has many positive tax implications. Because in 1997 changes to the tax code passed, these tax provisions are much more favorable for most home owners today.

According to the law, married home owners don't have to pay taxes on up to $500,000 in capital gains realized on the sale of their homes. The $500,000 provision applies to married home owners filing joint returns and is restricted to homes sold on or after May 7, 1997. To qualify, the home would have to have been used as a principal residence for at least two of the previous five years. Taxpayers who file individual returns may claim up to $250,000.

According to the previous rules, the tax on any profit would be deferred if the sellers of the home bought and occupied another home of equal or greater purchase price within 24 months before or 24 months after the sale of the old residence.

The previous law also allowed a one-time capital gains exclusion. Home sellers who were at least 55 years old could realize a tax-free gain of up to $125,000 if the home had been used as a principal residence for at least three of the previous five years.

Under the old law, home sellers could use their capital gains exclusion only once after turning 55. Under the new law, people over 55 who have already used their exclusion can take advantage of the new tax provisions, assuming that they have occupied their new residence for at least two of the previous five years.

First time home buyers could also benefit from a special provision of the new tax law. One of the largest obstacles to new home buyers is usually the inability of to save enough money for a downpayment. In 1997, Congress passed a new provision allowing first time home buyers to withdraw up to $10,000 from their IRA accounts if the money is used for a downpayment on a home. The penalty-free provision can be applied to IRAs owned by the buyers, their parents or their grandparents. Under current law, early withdrawals from an IRA incured a 10 percent penalty.

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