Law raises ceiling on house taxes

Wednesday, June 21st 2000, 12:00 am
By: News On 6

If you sell your house at a profit, how much -- if any -- tax will you owe?

On the lifetime capital-gain exclusion, the $500,000: Is that like the old one, where you have a once-in-a-lifetime exclusion of $500,000? Or can you keep repeating the $500,000? And do you need to live in the same house for two consecutive years, or can you live part-time in another primary residence and accumulate the two years that way?

 F.M.

Here's the general rule: If you sell your house at a profit, and you've owned and lived in it for at least two of the five years before the date of the sale, you can escape federal income tax on up to $500,000 of the profit if you're married, or up to $250,000 if you're single.

What's more, you can then buy another house, live there two years, sell it at a profit, and once again take advantage of this tax break, said Kevin F. Long, chairman of the technical advisory board for the Masschusetts Society of Certified Public Accountants.

In addition, if you qualify for this tax break, you need not report the sale on your federal income tax return, said Long, a lawyer, CPA and partner at Hinckley, Allen & Snyder LLP, a law firm with offices in Boston and Providence.

At one time, the rules were more complicated: In general, you could postpone the tax when you moved from house to house, but you had to fess up if, for example, you finally sold and moved to an apartment.

You could escape the tax altogether, but only if you were a certain age, your profit was below a certain amount, and you met some other rules. (And if you met all these rules, you could escape the tax only once in your lifetime.)

The new law was enacted in 1997, and makes things a lot easier for most people.

Some other points:

You need not have lived in your main house for two consecutive years to qualify for the break; you generally can take advantage if you've lived there for two of the previous five years.

The tax break applies only to your principal residence, not to a summer home or vacation home. (However, some readers have sold their main house, converted their vacation house to their main house, lived there for two years, sold it at a profit and used the tax break again.)

Whether you'll have to pay a state income tax depends on where you live. (Rhode Island and Massachusetts generally follow federal rules.)

If you sell your main house for more than $500,000, the rules can get complicated, so seek professional help. (You should also seek help if you've used your home for business purposes or as rental property, or if you financed your home under a federally subsidized program.)

There are lots of other rules regarding this tax break, too many to list here. For more information, see Internal Revenue Service Publication 523, "Selling Your Home." For your free copy, visit your local IRS office, call the IRS at 1-800-829-3676, or see the IRS's Web site:

I cashed in HH bonds about a week ago or less, and then I read in the MoneyLine . . . that I bonds have a very good rate. But I had already sent in my HH bonds for cash, and I want to know if I will be taxed on E bonds that I traded for HH bonds in '89, or do I have a time limit to buy I bonds so I won't be taxed.

 A.H.

One step at a time:

In 1989 you rolled over Series E bonds -- with all their accumulated interest -- into Series HH bonds. This let you postpone payment of federal income tax on that interest. The tax comes due only when you cash your HH bonds or when they mature. You cashed your HH bonds.

Now tax is due. New Series I bonds earn interest at an annualized rate of 7.49 percent for the first six months you hold them. You now wish you hadn't cashed your HH bonds; you would have preferred to roll them over into I bonds instead. The rules say otherwise: The only savings bonds you can acquire through rollover is the HH bond, said John J. Foley, spokesman for the Bureau of the Public Debt, which runs the bond program.

Once you get the proceeds from your HH bonds, you can buy some I bonds. You can also postpone tax on the interest that your I bonds accumulate; the only time tax is due is when you cash the I bonds or they mature (30 years from date of issue).

Neil Downing is a staff writer at The Providence Journal in Rhode Island and author of Maximize Your IRA. Questions about your money matters? Call us at 1-401-277-7484 or 1-888-697-7656 and leave a message. Or write: MoneyLine, Providence Journal, 75 Foutain St., Providence R.I. 02902. We can't reply personally; as many questions and issues as possible are addressed in this column.