The Real Deal

Boomers benefit from tax changes

The elimination of the capital gains tax penalty for most people has resulted in notable changes in the housing market, according to the Silicon Valley Association of Realtors. Prior to 1997, at the age of 55 or over, there was a once-in-a-lifetime exemption from taxation on up to $125,000 in gains on the sale of a home, which created what economists call "an artificial market consequence."

This so-called artificial market consequence is easier to see now that the tax law has changed and consumers are able to base their housing decisions on need and personal desires, rather than on Uncle Sam.

To avoid the tax consequences under the old tax law, people felt pressured into trading-up to a more expensive home even if their first choice would have been to trade down to a smaller and less costly property. Now, families are freer to make housing choices based on their needs and desires.

Under the 1997 Taxpayer Relief Act, individual sellers may exclude up to $250,000 in capital gains on the sale of a home from taxation, as long as they have lived in that home as a principal residence for two out of the last five years. Married couples can exclude up to $500,000 from taxation on a joint return. The exemption is for any age, can be claimed every two years and there is no requirement to buy another house. This means that the tax penalty has essentially been eliminated for the vast majority of home sellers.

The baby boom generation appears to be taking advantage of this change. As children leave the house, many people seek a simpler lifestyle and opt to buy a smaller but well-appointed property that is easier to maintain. This has been a factor in record condo sales and sharper condo price increases over the last few years.

According to the National Association of Realtors, sales of existing condominiums and cooperatives rose 3.8 percent to 738,000 units in 2001, a new record. At the same time, the median price rose 9.7 percent to $122,600. Part of the rise in condo prices results from higher sales of more expensive properties as baby boomers choose units with lots of amenities.

The favorable capital gains tax treatment also is boosting sales of vacation homes. Some home sellers are using part of their gains to also buy a second home, sometimes as a trial retirement home.

The old once-in-a-lifetime exemption had been around for so long that many people today are unaware of the change and how it might affect their next housing choice. It's a good idea to check with a tax advisor for details and how they apply. In addition, IRS publication 523, "Selling Your Home," has more information on the new rules. It's important to also consult with a Realtor who can help explore all real estate options available.

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Information provided in this column is presented by the Realtor members of the Silicon Valley Association of Realtors at www.siliconvalley-realtors.org. Send questions on any topic to jnewton@jnpr.com.

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