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Balance Budget Act 1997


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November 1997

Editor: Scott Gottlieb, CPA
Assistant editor: Susan A. Maffetone, CPA

Implementing the Tax Relief Act of 1997

By now you have probably read about the major changes in the tax law (see important new tax Information). At this time we would like to focus on implementing the new laws into action. Since 1997 is not yet over, we will start with strategies that can still be implemented in the coming months.

Sale of Your Home

The Old Tax Rules:

Generally the sale of your home creates taxable gain to the extent the sales price exceeds your tax basis in the home (tax basis is – purchase price plus capital improvements you made to it.)

Example: You purchased your home five years ago for $150,000, you changed all windows in home for $25,000, and your tax basis would be $175,000. You sell your home for $200,000. Your taxable gain would be $25,000.

The old law however had two different tax breaks for homeowners:

    1. Tax on the gain was postponed indefinitely if within two years before or after the sale you spent the proceeds on a new principal residence that cost the same or more then the old residence.


    2. If you were age 55 or older you had a one-time exclusion of $ 125,000 if you had used the home as your principal residence for at least three of the five years before the sale.

The New Tax Rules:

The new tax law replaces these two tax breaks with the following applicable to sales made after May 6, 1997:

An exemption of $250,000 ($500,000 for married couples) of the gain on the sale of your home.

Qualifications to the new exemption: (all must apply to you)

    1. You must have owned the home for five years before the sale.
    2. You must have used it as your principal residence at various times totaling at least two years out of the five.
    3. The exclusion can be used as often as you qualify for it, not to exceed once every two years.

Exceptions to the qualifications:

You may still be able to qualify even if one of the above qualifications is not met.

Exemption to the two-year residency rule: A partial exemption is allowable. You can still exclude part of the gain based on the number of months you resided in the residence.

Application of new rules for 1997

  • If you want the new law to apply to a sale after May 6, 1997 but before the effective date of the new law (July 28, 1997) an election must be made on your 1997 tax return.
  • If you do not want the new law to apply, and you had a contract to sell prior to or on the effective date of the new law, then you must also elect on your return.
  • Also you must elect, if your gain would not have been recognized under the two-year rollover exclusion.

If you have sold your home this year and would like to discuss the tax implications please contact our office.

Look for the free 1997 tax organizer in coming months. An easy way to help you organize that shoebox of tax related stuff.


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Other issues of NewsBytes see our archives





1997-2009 Scott Gottlieb, CPA. All Rights Reserved.

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The materials on this Web site are for informational purposes only and are not intended and should not be construed as accounting advice. This information is not intended to create, and receipt of it does not constitute, a CPA-Client relationship. You should not act upon this information without seeking counsel from a Certified Public Accountant