The Taxpayers Relief Act of 1997 that was signed into law this month has made some important changes to the way real estate is taxed. Real estate professionals will be challenged to not only learn the new rules but to forget the old ones.

Opportunities are available for agents to promote themselves as real estate professionals familiar with the latest changes in tax law. This can be a point of difference that could give the REALTOR� the competitive advantage over complacent agents who don't think it important or delegate the education of homeowners to their tax professionals.

For residential agents, the most significant impacts the sale of a principal residence. In the past, as long as a homeowner bought a replacement property more expensive than the one that was sold, the gain on the sale was deferred. It could be deferred indefinitely.

Buying a less expensive home could trigger the recognition of that gain causing tax consequences. However if a taxpayer was over 55 years of age, a once in a lifetime exclusion of $125,000 was available assuming certain rules were met.

Those were the old rules. The new rules apply to any sale of a principal residence made on or after May 7, 1997. Couples filing a joint tax return can exclude up to $500,000 of gain on sale of a principal residence. Single return filers can exclude up to $250,000 of gain.

If the gain on the sale exceeds the maximum exclusion, normal capital gains tax rates will apply.

To qualify for the exclusion, the taxpayer(s) must have occupied the home for two of the five preceding years. This means that the home may have been treated as a rental property but must have been a principal residence for two of the last five years. There is a formula for giving a partial exclusion for taxpayers who cannot meet the two year requirement.

This extremely generous exclusion applies only to principal residences and doesn't apply to 2nd homes or vacation homes. The sale of these types of properties are treated as income producing property to which preferential capital gains tax rates would apply.

This new exclusion replaces the once in a lifetime exclusion reserved for people over 55 years of age. It will allow a homeowner who meets the requirements to make a tax free profit on the sale of a home without having to reinvest in another home. This provision should open many new strategies for homeowners that haven't been available in the past.

For instance, if a person is being transferred from a high cost area to a lower priced area, in the past the person would have to buy at least as expensive a home to defer gains. Now, they can make a tax-free profit, subject to the limits on the sale and buy down and incur no tax liabilities.

Another example might be a person who has a large gain in a rental property might convert it to a principal residence for two years and sell it and only pay tax on the depreciation recapture.

The capital gains tax rate has been reduced from a maximum rate of 28% to 20%. If a taxpayer is in the 15% tax bracket, the maximum capital gains rate is now 10%. This rate is in effect for sales or exchanges made after May 7, 1997

The holding period for assets to qualify for preferential capital gains rates have been extended from 12 months to 18 months. This is effective for sales or exchanges made after July 28, 1997. However, there are transition rules that apply for property sold after that date that has been owned more than 12 months but less than 18 months.

Any part of the gain that is affected by depreciation must be recaptured at a 25% rate.

The deductibility of health insurance premiums for the self employed has been increased. It will phase in according to the following schedule:

	1997 		40%
	1998,1999	45% 
	2001,2002	50%
	2003-2005 	80%
	2006 		90%
	2007 and after	100%

Sale of a Principal Residence by Married Couple filing jointly- Example One

	Purchase Price			$200,000
	Plus Purchase Costs	      	   5,000
	Acquisition Basis		$205,000
	Plus Capital Improvements	  30,000
	Adjusted Basis			$235,000

	Sales Price			$850,000
	Less Adjusted Basis	  	 235,000
	Gain on the Sale		$615,000
	Less Exclusion	 		 500,000
	Taxable Gain			$115,000
	Times Max Tax	         	     28%
	Tax Due				$32,200

Sale of a Principal Residence by Married Couple filing jointly- Example Two

	Purchase Price			$200,000
	Plus Purchase Costs	      	   5,000
	Acquisition Basis		$205,000
	Plus Capital Improvements	  30,000
	Adjusted Basis			$235,000

	Sales Price			$350,000
	Less Adjusted Basis	  	 235,000
	Gain on the Sale		$115,000
	Less Exclusion	  		 500,000
	Taxable Gain			       0
	No Tax Due

Sale of an Income Property Example

	Purchase Price			 $80,000
	Plus Purchase Costs	    	   2,000
	Acquisition Basis		 $82,000
	Less Depreciation Taken	 	  35,000
	Adjusted Basis			 $47,000

	Sales Price			$100,000
	Less Adjusted Basis	    	  47,000
	Gain on Sale			$ 53,000
	Less Depreciation	   	  35,000
	Capital Gain	    		  18,000

	Depreciation			  35,000
	Recapture rate			     25%
	Tax Due				   8,750

	Capital Gain			  18,000
	Max Tax Rate			     20%
	Tax Due				   3,600

Valuable tax information on the sale of a principal residence and other tax laws as they apply to homeowners are covered in the newly updated RS 205, Financial Skills for the Residential Specialist. Other topics include a variety of forms and tools used to explain financial concepts to buyers and sellers like how to choose the best loan, what are the tax benefits of home ownership, refinancing a home, how to pre-pay a mortgage and others.

Strategies for buying and selling rental property is part of the curriculum covered in RS 204, Making Money with Single Family Homes.

For additional information, contact the Residential Sales Council at 800-462-8841 or go to http://www.rscouncil.com

Pat Zaby is the President of PREP™ Software, developers of the REAL Suite that includes contact management, presentation, financial, and multimedia in one integrated package. He has been a REALTOR� since 1968 and has been involved with automating real estate agents for over 12 years and speaks to tens of thousands of people a year on the subject.

PREP™ Prospecting is easy-to understand, requires less keystrokes, and gives you more control than any other contact manager. It comes loaded with valuable letters, postcards, action plans, and telephone scripts that you can start using immediately. Wizards guide you through tasks effortlessly that are tedious routines in other programs. The data moves seamlessly throughout the entire PREP™ suite of products.

If you are thinking of changing from another contact manager, PREP™ Prospecting has automatic imports to transfer your data effortlessly so you can start enjoying the marketing power you expect from PREP Software. For information on competitive upgrades, phone 972-991-1998 or [email protected] or the website at http://www.prepsoftware.com.