The Internal Revenue Service (IRS) is to shut down a loophole in the law that enabled rich homeowners to double their tax breaks on the sale of their homes.
As much as $500,000 in profits from the each sale ($1,000,000 per couple) was exempt from tax as an inadvertant result of the capital gains law, introduced in January this year, cutting capital gains tax rates on properties for a minimum of five years from 20 per cent to 18 per cent. Taxpayers were allowed to start afresh with assets they owned before 2001 and this meant that technically they could file a particular exclusion form with their 2001 tax returns that enabled them to treat the property as sold but then re-bought on January 1, 2001.
Of course capital gains would be levied on the profit of the 'phantom' or deemed sale but if held for more than five years they would be charged the lower rate. Also, homeowners are allowed to discount as much as $250,000 per person or $500,000 per couple of the profit made on the sale of a property that they have lived in for two of the last five years. This could be doubled if the taxpayers had entered into a deemed sale to freeze the value of their homes so they could exclude the profit from tax but then start afresh with the residential real estate exclusion and then repeat the process two years on thus doubling their capital gains break.
Confused? Well the IRS isn't. The department has now ruled that taxpayers can enter their residential property into a deemed sale but can not use the exclusion form when doing so thus forcing them to pay full capital gains tax on the property.
Philip J Holthouse, a partner in the Los Angeles tax law and accounting firm of Holthouse Carllin & Van Trigt, described the IRS as 'killjoys.' He told the Los Angeles Times: 'This was about the only fun you could get out of that new capital gains law, and they're not going to allow it. I'm deeply disappointed.'
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