Janis Peterson, GRI, ABR, CSP Realtor®
Philadelphia Main Line Homes and Real Estate
Montgomery, Delaware, and Chester Counties
Relocation Specialist
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Subject: Downsizing Looks Good Now that Penalties Are Gone

It used to be that consumers looking to sell a larger home and downsize to a smaller one had to bite the bullet and pay hefty capital tax gains on their profit unless they were buying a new, more expensive home.

Federal tax changes in 1997, however, make the timing right for trading the BIG house in, and preserving some of your assets in the process without taking on a larger home and mortgage.

And you don't have to be 55 or older to reap the advantages.

In fact, a variety of home owners are just beginning to take advantage of the biggest major federal property tax change in more than 10 years. Approved in 1997, the change has special appeal for retirees and empty nesters looking for a smaller, easier-to-maintain home, but also for a less obvious would-be seller-younger homeowners seeking to downsize their mortgages.

Whatever your age category or intentions, there's clearly a benefit to downsizing now if that's your intent. Here's an example:

Let's say a couple bought a home for $100,000 in 1969, but it's now worth $450,000. Under the old tax laws, a person 55 or older either had to purchase a more expensive home to avoid capital gains taxes or sell the home and take a one-time shelter of $125,000 out of the $350,000 gain. That seller would have to have paid as much as 28% in taxes on the remaining $225,000 profit.

Today there's no longer a once-in-a-lifetime (age 55 or older) limit on the tax exemption as before, as long as you've lived in the home as your primary residence for two out of the past five years preceding the sale. (Owners selling their primary home can apply the tax exemption every two years.)

And, there's no capital gains tax on any of the profit from the sale. You keep it free and clear and you don't have to buy up to do so if you're a married couple filing taxes together and the gain does not exceed $500,000. If it does, you'll pay a tax rate of no more than 20% on the profit.

Single owners may exempt $250,000 from capital gains on the sale of a home. Two singles who own a home jointly but file separate tax returns may each exempt $250,000.

However, owners must recognize gain to the extent of any depreciation allowable with respect to the rental or business use of a residence for periods after May 6, 1997.

If you haven't taken a look at the new capital gains tax laws relating to homesales (endorsed by Congress and approved by the President in May 1997) you ought to do so. Or ask your real estate agent or tax accountant to explain the changes. You might be pleasantly surprised, especially if you'd like to stash away some of the profit you've accrued over the years without penalty.

The advantages are obvious for the older buyer who wants to downsize to a smaller home, have less space to maintain, or maybe make a move to a warmer climate, while reaping a healthy stash of cash for retirement. But younger buyers who feel bogged down with weighty mortgages also should take note: You now have the flexibility to downsize and save on both the monthly payment and the penalty.

In fact anyone who wants a smaller home, smaller payments, and a nice tax-free profit can make the move without the hefty tax penalties of the past.

So what are you sitting there for? Start looking for the new, smaller place. This tax law change is proof to the adage that less really is more.

"Real Service in Real Estate." For a personal consultation on buying or selling real estate, Janis Peterson, GRI, ABR, CSP Realtor® can be reached at (610) 642-3744, e-mail: jp4re@pahomes.com. Prudential Fox & Roach Realtors® is an independently owned and operated member of The Prudential Real Estate Affiliates, Inc.

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