GMAC Real Estate Taxpayer Relief Act and Seniors
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Taxpayer Relief Act and Seniors

Takeaways

  • The Taxpayer Relief Act of 1997 repealed and replaced the old one-time $125,00 capital gains tax exclusion on the sale of a primary residence.
  • The new law allows for up to $500,000 capital gains tax-free for couples.
  • This exclusion can be exercised as often as every two years.

Did you know?

  • The new exclusion created by the 1997 act is known as Internal Revenue Code 121.
Seniors have new flexibility making tax-free money from home sales. Before the Taxpayer Relief Act of 1997 anyone could defer paying taxes on the gain of the sale of their primary residence. To defer the tax the person was required to buy, or build, a home of equal or greater value to the home sold within two years. Along with the rollover provision, the old law allowed homeowners over 55 a one-time $125,000 capital gain tax exclusion when selling a primary residence.

The Taxpayer Relief Act of 1997 did away with both the rollover provision and the senior tax exclusion. These were replaced with Internal Revenue Code 121, a much more powerful tax break for anyone selling a primary residence. This break applies to any homeowner, not just seniors, and can be used as often as every two years rather than the once-in-a-lifetime restriction on the old tax break.

Meet the Replacement -- Internal Revenue Code 121

The IRC 121 tax break is $500,000 for couples and $250,000 for individuals. The catch is you have to own, and occupy the home for two of the previous five years to claim the tax break. What this means for seniors is say you’ve moved into your vacation second home and turned it into your retirement home, but you still own and rent out your previous primary residence.

If you decide to sell that house within five three years of turning it into a rental second home, you can claim the IRC 121 tax break on the sale. The reason is you occupied the home for two of the previous five years. Even though you’ve been earning rental income on the property ever since moving out, because of IRC 121 the IRS views that second home as a personal residence.

IRC 121 applies to any home meeting the personal residence qualifications. Even if you took your one-time $125,000 tax exemption before the Taxpayer Relief Act of 1997, IRC 121 restored your ability to sell your primary home without paying tax on the gain.

Search for Second Homes for Sale

To search for a selection of second homes for sale, please visit lifestylehomesearch.com, or visit the website of a GMAC Real Estate Office that serves the area where you'd like to buy a second home. To learn more about buying Second Homes or Vacation Homes, explore the rest of this section, or contact a GMAC Real Estate Agent.