Cut in Capital Gains Tax on Homes Would Be Nice

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It looks as if President Clinton will propose a cut in the capital gains tax for people who make a profit on the sale of a home. Good deal.

We will find out Feb. 6, when he sends his budget to Congress.

Mr. Clinton promised this tax cut during the campaign, as did his Republican opponent, former Sen. Bob Dole. While the details of the two proposals differed, both seemed a way to make political points without having much impact on government revenues.

I think such a change might have more of an impact than anyone has predicted.

But before a proposal is passed, maybe even before Mr. Clinton sends one to Congress, it probably will get some interesting fine-tuning.

Home sellers now can defer payment of a capital-gains tax on the profit from the sale of a principal residence if they buy another principal residence of equal or greater value within two years. Or, if they are 55 or older, they get a one-time exclusion from the tax on $125,000 of the profit without having to buy a home of equal or greater value.

What Mr. Clinton has proposed is an exclusion of $250,000 for a single person and $500,000 for a married couple every time they make a profit on the sale of a principal residence, but not more often than every two years. There is no requirement that they buy another house or be 55 years old.

I think this would be a big, maybe huge, development for a number of reasons.

The baby boom generation is moving into its 50s now and becoming empty-nesters. Empty-nesters generally want a smaller home, maybe a nice low-maintenance condo in a warm climate. But if it costs less than the larger family home they are selling, they would have to pay a capital-gains tax. So I suspect many of them are waiting until they turn 55 to get the one-time $125,000 exclusion, maybe in combination with the rollover deferral.

Give them that $250,000 to $500,000 exclusion, and they could move so fast it would make your head spin. This would be particularly true if they were moving to Florida or somewhere where home prices are far below those in Washington or other high-priced real estate markets. Now, in such a move, you would pay a capital-gains tax even if you got both a rollover deferral and the one-time $125,000 exclusion.

Figure it out. If you sell a house in the Washington area for $400,000 that you bought for $70,000 30 years ago you have a profit of $330,000. Subtract the $125,000 exclusion and that leaves $205,000. Buy a condo in Florida for $125,000 and you have to pay a capital-gains tax on $80,000, which at 28 percent is $22,400. …