Did you or a senior in your life sell a home in 2006? Will you have to pay the "man" in 2007? The answer to that depends on if you sold a home prior to 2007! While tax laws change, their effects can linger for years.
I wrote about the change in the Capital Gains Tax last week (H.R.3648 Section 7) but as you start gathering your documents for the upcoming tax season, it's not the only tax law you'll need to consider-especially if you sold a home prior to 1997.
In 1997 President Clinton enacted The Taxpayer Relief Act. This abolished two old tax laws: the rollover and the once in a lifetime exclusion. The rollover let us defer paying taxes from the sale of a home if another of the same or greater value was purchased within two years. The once in a lifetime allowed seniors over the age of 55 to exclude gains up to $125,000.
If you sold a home prior to 1997, and took advantage of the rollover tax deferment, if may effect your tax return for 2006!
If you're a left brainer and like numbers, you'll appreciate this example. If you're a right brainer and numbers hurt your head, just get your Settlement Statements or Hud 1 form s together and bring them to your tax preparer!
Let's say you purchased a home in 1970 for $100,000 and sold it in 1980 for $200,000. Subtract what you paid for the home from the profit ($200,000-$100,000) and you have the basis of your new home-in this case the basis is $100,000.
Then, you sold your home again in 1990 for $400,000 and purchased a $500,000 home. Now beacause of the rollover you have $300,000 profit ($400,000-$100,000) you are deferring taxes on. The basis for your new home is now $200,000.
If you are married and filing jointly the current capital gains tax says you can make $500,000 profit on the sale of your home and not pay capital gains tax. If you sold your home for $750,000 last year, you'd have a profit of $550,000. This means there is $50,000 in profit that is subject to the capital gains tax ($750,000-$200,000).
This is where I remind you of the importance of a good tax adviser. Your tax adviser will help you figure out what other items can be used to help you lower your profit, such as home improvements and commission costs to sell your home.
If you took advantage of the rollover deferment and sold your family home in 2006, don't wait until April 14th to do your taxes this year.