Gary Maydew, Accounting, (515) 294-9450
Michelle Johnson, News Service, (515) 294-8986
ISU PROF, IOWANS TO REAP REWARDS OF CAPITAL GAINS TAX CHANGE
AMES, Iowa -- Many Iowa homeowners are suffering from the lock-in effect, but a change in the capital gains tax law could be the key, according to Gary Maydew, associate professor of accounting at Iowa State University.
The lock-in effect can occur when a property has shown an increase in value on paper, but owners are unable to benefit from that increase until the property is sold. Unfortunately, even the sale of a home could bring the threat of costly capital gains tax. Not any more.
"The tax relief act of 1997, signed into law last August, could provide many homeowners with the key to unlock the equity in their homes," said Maydew.
The law states that taxpayers can take a $250,000 exclusion from capital gains tax on the gain from the sale of a principle residence. For joint filers, a $500,000 exclusion is possible. The law is retroactive from July 6, 1997, and is renewable every two years.
The law could have a dramatic effect on Iowa's real estate market. It makes housing at all price levels a more attractive investment, Maydew said.
"The new law allows for almost total flexibility," said Maydew. "After Jan. 1, people can take the proceeds from the sale of a principle residence and buy up to a new home, buy down to a smaller home, or not purchase another home at all. The choice is theirs."
But it didn't used to be. The new law replaces two old capital gains laws. One allowed persons 55 or older to exclude from tax the first $125,000 of gain on the sale of a principle residence. However, the exclusion was a once in a lifetime benefit and had to be used in a lump sum.
The second law was known as the "roll over" law. It allowed one to postpone gain on the sale of a residence, but only if the gain was reinvested in a new house.
"This new law carries with it tremendous benefits for Iowans," said Maydew. "What other investment lets you not pay tax on $500,000 of profit?"
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