The new tax laws provide tax relief on the sale and use of your home. A new provision allows a tax-free sale of your home every two years on up to $250,000 of capital gain ($500,000 for married couples). Capital gains tax rates were reduced from 28% to 20% (10% in 15% tax bracket), if you have a home office. Begining in 1999, the new law relaxed the rules allowing a deduction for home office expenses.

TAX-FREE GAINS ON SALE OF YOUR HOME

    THE OLD LAW - The sale of your home, like the sale of any other asset, generally creates taxable gain to the extent the net sales price exceeds your tax basis in the home (generally the cost of the home plus cost improvements you made to fix it). However, a home sale was generally eligible for two different tax breaks if it was your principal residence. First, tax on the gain was postponed indefinately to the extent that within two years before or after the sale you spent the proceeds on a new principal residence. Second, if you were at least 55 years of age, you generally had a one-time opportunity to exclude up to $125,000 on the gain of the sale of a home you had used as your principal residence for at least three of the five years before the sale.

    THE NEW LAW - A new rule replaces these special rules and lets you pay no tax on up to $250,000 ($500,000 for married couples) of the gain on the sale of your home. To qualify, you must have owned the home for five years before the sale and used it as your principal residence at various times totaling at least two years out of the five. If when you bought your current home you used the prior two-year rollover to defer any gain on the sale of your prior home, your ownership and use periods for the current home include those of the prior home as well as those for all other homes for which you also used the two-year rollover. This means that you may be eligible to use the new rule right now. This exclusion can be used as often as you qualify for it, up to a maximum frequency of once every two years. Sales before May 7th, 1997, are not counted in determining whether you have sold a home in the prior two years. If you can't meet the two-year residency rule because of unforeseen events such as a job change or health problems, you can still exclude from your income the part of your gain that corresponds to the time you did spend residing in the home.

    If you are married and file a joint return with your spouse, you can exclude up to $500,000 of gain on the sale of a home you share as long as either one of you has owned the home for at least five years before the sale, both of you meet the two-year principal residence requirement, and neither of you used the exclusion during the two years before the sale.