If the home you sell was your primary residence two of the last 5 years, guess what? There is no tax on your capital gains!
Whether we’re talking homes for sale in Glassell Park, commercial real estate in Eagle Rock or homes in Mt. Washington, nobody can dispute that it has been a seller’s market. Northeast Los Angeles real estate market remains red hot and many property owners have cashed in.
Though surely not everyone …
I can’t tell you how many times over the last 29 years someone has told me, “I don’t want to sell because I don’t want to pay the tax if I don’t buy another property within 2 years.”
Guess what? This rule went off the books in 1997! Yes, the Taxpayer Relief Act of 1997 changed all that! This was when Bill Clinton was President. Yes, boys and girls, we did have a Clinton in office once and he was the last president who actually balanced the budget and had zero federal deficit! He also reduced the federal debt. Sounds like a Republican, doesn’t it? Well, he wasn’t—but this is a real estate article, not a political one.
Before 1997, you could sell your primary residence and defer all the capital gains tax as long as you bought another primary home for the same or higher price within 2 years. You could do this all your life and then when you passed away your heirs could inherit the home with the capital gains tax eliminated. Such a deal—but actually the new rule was better for most people.
The new rule still exists today and it says that if you sell your property as long as it was your primary residence 2 of the last 5 years, you can keep the first $250,000 (and if you are married, $500,000) of net gain with no tax on your capital gains at all! Plus, you never have to buy another house as long as you live to keep that tax-free money. But your capital gains tax, if any, is still eliminated when you die, so you can still will your house to your heirs and they won’t pay capital gains tax if you have a trust. More on that in another article.
The purpose of this law (I think) was partly to encourage people to sell their homes sometime before they died—the idea being to stimulate the real estate market. Also, it benefitted those who wanted to downsize instead of always buying a more expensive property, or to get out of buying any kind of replacement property. It also stimulated the general marketplace because people could use that money for anything without penalty. Send your child to college? Fund your life in the retirement community? Buy a bass fishing boat? The possibilities are endless.
There are more tax law fictions that persist to this day, but another time, dear ones. We can only swallow one frog in a day.