The new tax law signed by President Clinton on August 5th makes it possible to sell a primary residence and downsize to a less expensive house without suffering a large federal tax bite on capital gains.

What are "capital gains?" Capital gains realized on the sale of a house consist of the sale price minus the original purchase price and minus other items such as costs of selling the house and costs of improvements.

The new law:

• Provides a $500,000 exclusion for couples and a $250,000 exemption for a single person.
• Allows the exclusion to be used an unlimited number of times, but only once in a two-year period of time.
• Requires that a seller must have lived in the house as a primary residence for two of the past five years. (There are some exceptions to the two-year residency rule for health and job changes.)
• Taxes profits in excess of the $500,000/$250,000 exemption at a new, lower capital gains tax rate of 20%. (The tax rate for low-income brackets is only 10%.)
• Contains no rollover provision and no $125,000 once-in-a-lifetime exclusion.
• Affects primary residences sold on or after May 7, 1997.

The new law simplifies the capital gains tax provisions and provides more choices for people who wish to sell their homes. Some people who have expensive homes may decide to move down to less expensive homes in order to free-up assets for other investments. For more information on the details of this new law, consult your tax advisor.

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