On August 5, 1997, President Clinton signed into law The Taxpayer Relief Act of 1997.  This is the first major piece of tax legislation since the Tax Reform Act of 1986.  For those who own real property held for productive use in a trade or business or for investment and other capital assets the Act provides capital gain relief.  For taxpayers owning a principal residence the rollover rules and once in a lifetime exclusion rules have been replaced with new, and in most cases, more liberal rules for the treatment of gain on the sale of a principal residence.  Below is a brief outline of the new capital gains law and new rules for treatment of the gain from the sale of a principal residence.

Reduced Capital Gain Rates:  For individuals, the maximum, rate on net capital gain from sales or exchanges occurring after May 6, 1997, will be:

• For property held more than 12 months, the sale of which occurred after May 6, 1997 and before July 29, 1997, the maximum rate of 20% will apply (10% for taxpayers in the 15% tax bracket);

• For property held more than 18 months, the sale of which occurs after May 6, 1997, the maximum rate of 20% will apply (10% for taxpayers in the 15% tax bracket);

• For property acquired after December 31, 2000 and held more than 5 years, prior to its sale, the maximum rate of 18% will apply (8% for taxpayers in the 15% tax bracket);

• For property owned on December 31, 2000, a taxpayer may elect to be treated as taxpayer who acquired property after December 31, 2000 for purposes of the 5 year rule and the 18% rate (8% for taxpayers in the 15% tax bracket);

• All depreciation taken on real estate shall be recaptured at the tax rate of 25%, in other words, for any real estate for which depreciation was taken (allowed or allowable), the amount of the gain attributable to depreciation will be taxed at 25% and the amount of the gain attributable to appreciation shall be taxed at either 20% or 18% as described above.

• For sales before May 7,1997 (no matter how long the property was held) and sales after July 28, 1997 (of property held for more than 12 months but not more than 18 months), the current 28% maximum rate will continue to apply.

Gain from the sale of a Principal Residence:  This part of the Act allows the taxpayer to exclude up to $250,000 of gain ($500,000 for married couples filing a joint return) realized on the sale or exchange of a principal residence.  The Act applies to any sale or exchange that occurs after May 6, 1997.  To be eligible, the residence must have been owned and used as the taxpayers principal residence for a combined period of at least two (2) years out of the five (5) years prior to the sale or exchange.

The prior law permitted a "once in a lifetime" exclusion of $125,000 of gain.  Unlike the prior law, this exclusion will apply each time the taxpayer sells or exchange a principal residence, although the exclusion may not be claimed more frequently than every two years.  Also, unlike the prior law, the taxpayer is not required to acquire a replacement principal residence to claim the exclusion. 

For those taxpayers who wish to take advantage of the rollover provisions or the once in a lifetime exclusion under the prior law, they must have either (1) sold their principal residence prior to the date of enactment; (2) entered into a binding contract for the sale of their principal residence on or before the date of enactment; (3) acquired a replacement residence or entered into a binding contract for the purchase of a replacement residence on or before the date of enactment.  The date of enactment is the date President Clinton signed the tax legislation on August 5,1997.