|
Tax Reform Multiplies Second Home Possibilities
Coupling Dreams with Tax-Deferred Exchanges
Age 65 . . . The traditional retirement goal line . . . Finally time to relax at the lake and make the most out of the second home you’ve only seen on long weekends and a couple lazy summer weeks in August.
“Tell the kids they can visit, Martha, but let’s keep it to two nights.”
But it’s not happening quite that way for a lot of seniors who thought they were headed for full-time tinkering and peace and quiet. Sure, consumers are living longer and want to feel active and productive but scores of others have been financially crippled by stock-market losses, health-care costs, and overwhelming fears about the solvency of Social Security.
That’s the bad news. The good news is that everyone has the opportunity of acquiring a second home sooner, and, in this Report, we explain why.
The one reliable, dependable, financial lifesaver on the road to age 65 used to be tossed to consumers once, and only once, when they reached age 55. The $125,000 one-time capital gains exclusion on the sale of a primary residence often was viewed as a floating dock near the end of a choppy lake. Once you had paddled that far, you could rest, catch your breath, and continue the final distance to retirement knowing you had a new, $125,000, bright orange lifejacket in the bow if the water really got rough.
Given our ability to live longer, the rocky seas of the conventional financial markets, and the much publicized “tech wreck”, a new, longer-lasting financial lifejacket couldn’t have arrived at a more appropriate time. With one swoop of a pen, the once-in-a lifetime tax exclusion became a potential bonanza every two years for homeowners and investors of all ages. That change, coupled with the tax-deferred exchange on rental property, compounds the potential for profitable, second-home purchases sooner. The bottom line is that all owners of real property can now exercise options and combinations deemed taboo a few short years ago.
The Trigger behind the Boom
When President Clinton signed into law the Taxpayer Relief Act of 1997 on August 5, 1997, he changed not only the $125,000, one-time home sale exclusion for persons over 55-years of age, but also the “rollover replacement rule.” In essence, the home began to move from the “shelter” column into the “financial portfolio” column. Under the old law, a taxpayer could defer any gain on the sale of a principal residence by buying or building a home of equal or greater value within 24 months of the sale of the first home. Tax on the gain was not eliminated, but merely “rolled over” into the new residence, reducing the tax basis of the new home. If you sold a primary residence and failed to meet the requirements for deferral, the taxpayer faced a tax on current and previously deferred gain. The old law also contained an once-in-a-lifetime, $125,000 exclusion ($62,500 if single, or married and filing a separate return) of gain from the sale of the primary residence. The intent of the new tax code, which replaces the "rollover" provision and $125,000 over-55 exclusion, is to allow most homeowners to sell their primary residence without tax. It also dramatically simplifies record keeping for many people. Although it’s still wise to retain proof of the original cost of the home and significant improvements, tedious collection and retention of invoices and other records to substantiate the cost of home improvements probably won’t be necessary.
While some homes in the heartland of the U.S. had not appreciated at the rate of areas like San Francisco, Boston, New York, Miami and San Diego, the one-time over-55 $125,000 exclusion was absolutely in need of a makeover. Before 1997, the tax-free amount was last raised - to $125,000 from $100,000 - on July 20, 1981 – 16 years of absolutely constant benefit while some homes had tripled in value during the same time. The exclusion, which had jumped from $20,000 to $35,000 in 1976, then to $100,000 in late 1978, was terribly out of date and had not kept pace with inflation. Homeowners, especially retired folks, need more incentive to be mortgage-free. The one-time, over-55 exemption was becoming more of a one-time problem. “Buying down’’ had begun to carry the connotation of “losing out.”
Tax Reform Part 2
Tax Reform Part 3
Back To 1031 |
