Capital Gains Exclusion on Sale of Principal Residence - Issue Summary
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| What is the fundamental issue? |
| In 1997, Congress enacted an exclusion for the gains on the sale of a principal residence. Taxpayers who file a joint return can exclude up to $500,000 of gain from taxation. All others may exclude $250,000. The 1997 provision was not indexed for inflation. In 2007, the House passed a limitation to this proposal that, if enacted, would change the tax treatment of a home that is used as a second home or rental property and then converted to a principal residence. |
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| I'm a Realtor®. What does this mean to my business? |
| The exclusion is the most taxpayer-friendly provision enacted in many years. It offers an excellent retirement planning foundation. The 1997 legislation eliminated the requirement that proceeds from the sale of a principal residence be reinvested in another property of the same or greater value. This change facilitated mobility from high cost to lower cost areas. It also allowed the homeowner the greatest freedom in the use of his/her capital. Proceeds from the sale of a principal residence may be used to purchase another principal residence, a second home, investment property or other capital assets. |
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| NAR Policy: |
| The $250,000/$500,000 exclusion amount should be indexed for inflation. |
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| Legislative/Regulatory Status/Outlook: |
| While the President's Advisory Panel on Tax Reform has recommended indexing the exclusion, the cost of this proposal is unknown. Current fiscal pressures will require that any tax benefit of this type be "paid for." |
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