Homeowners, as well as potential home buyers, are winners under the Taxpayer Relief Act signed into law on August 5, 1997. Here are some of the real estate-related provisions of the new law:

Capital Gains Reductions and Depreciation Recapture

$500,000 Exclusion on Sale of Principal Residence

Section 1031 Like-Kind Exchange

Health Insurance Premiums for Self-Employed

Home Office Deductions

Penalty-Free Withdrawal From Individual Retirement Accounts (IRAs)

Brownfields, Environmental Remediation Expenses

Estate Tax Relief

Capital Gains Reductions and Depreciation Recapture

• $500,000 Exclusion on Sale of Principal Residence
• Capital gains tax rate reduced from 28% to 20% (10% in 15% bracket). Effective for sales or exchanges on or after May 7, 1997
• Holding period for all assets increased from one year to 18 months. Effective for sales or exchanges after July 28, 1997. Transition rules provided for property sold after that date, but held for less than 18 months but more than 12 months.
• Depreciation recapture tax rate 25%. Effective on or after May 7, 1997.
• Special rules to become effective after December 31, 2000, providing 18% capital gains rate (8% in 15% bracket) for assets held 5 years or more. In order to qualify for the 18% rate for property held before January 1, 2001, taxpayers must satisfy complex rules. No property sold before January 1, 2006 will qualify for the 18% rate.
• The alternative minimum tax (AMT) will not apply to capital gains benefits.
• No provision for indexing asset basis for measurement of gain.

$500,000 Exclusion on Sale of Principal Residence

• Couples filing a joint tax return can exclude up to $500,000 of gain on sale of principal residence. Single return filers can exclude up to $250,000.
• Gain in excess of $500,000/$250,000 taxable at capital gains rate.
• Effective for sales on or after May 7, 1997.
• Home must be used as a principal residence for two of the preceding 5 years. Exclusion does not apply to vacation or second home properties. Formula provided to give partial exclusion to those who cannot satisfy the two-year requirement.
• Provision replaces and improves rollover and $125,000 exclusion rules.
• No requirement to roll over proceeds and reinvest. Thus, homeowners have options to trade up or trade down on a tax-free basis.
• If a home is used as a principal residence and as a rental property during the period of ownership, any depreciation taken after May 7, 1997 must be recognized on sale.

Section 1031 Like-Kind Exchange

No change to current law for real estate.

Health Insurance Premiums for Self-Employed

• Self -employed individuals will be permitted to deduct their health insurance premiums based on the following phase-in schedule:
• 1997 40%
• 1998, 1999 45%
• 2000, 2001 50%
• 2002 60%
• 2003-2005 80%
• 2006 90%
• 2007 and after 100%

Home Office Deductions

Rules for deductions of home office expense are clarified so that individuals who

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