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Highlights of the 1997 changes in the IRS tax code

Sale of Principal Residence

Effective Date: May 7, 1997

Exclusion of gain on sale of principal residence An individual may exclude from income up to $250,000 of gain realized on the sale or exchange of a residence. The amount of excludable gain is increased to $500,000 for married couples filing jointly if:

1) Either spouse meets the ownership test,

2) Both spouses meet the use test, and

3) Neither spouse is ineligible for exclusion by virtue of a sale or exchange of a residence within the last two years.

Time and use test The individual must have owned and occupied the residence as a principal residence for an aggregate of at least two of the five years before the sale or exchange.

Frequency of sales or exchanges limits The exclusion applies to only one sale or exchange every two years, but pre-May 7, 1997 sales are not taken into account.

Old code retired This exclusion replaces the rollover of gain provisions of Code Sec. 1034 (no realized gain if a replacement principal residence is purchased of equal or greater value within two years), and the one-time $125,000 exclusion for taxpayers age 55 and older.

Gain recognized on depreciation The exclusion does not apply, and gain is recognized, to the extent of any depreciation allowable with respect to the rental or business use of a principal residence after May 6, 1997.

Exclusion prorated If a taxpayer does not meet the ownership or residence requirements, a pro rata amount of the $250,000 or $500,000 exclusion applies if the sale or exchange is due to a change in place of employment, health, or unforeseen circumstances.

The contents contained herein are intended for general informational purposes only, and should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. Anyone needing specific legal advice should consult an attorney.