What Was Deferred Gain on Sale of Home? Benefits and Replacement

What is a Deferred Gain on Sale of Home?

Deferred Gain on Sale of Home, repealed in 1997, was a tax law allowing homeowners to defer recognition of capital gains from the sale of a principal residence. Proceeds from the sale had to be used within two years to purchase a new principal residence of equal or greater value. The tax deferral was called a "rollover," and the Deferred Gain on Sale of Home tax law was called the "rollover rule."

Deferred Gain on Sale of Home was replaced with the Home-Sale Gain Exclusion rule.

Understanding Deferred Gain on Sale of Home

The Taxpayer Relief Act of 1997 repealed the rollover rule. At the same time, it also abolished the over-55 home sale exemption which allowed a $125,000 once in a lifetime capital gain exclusion on the sale of a principal residence by taxpayers 55 and over.

The Home-Sale Gain Exclusion rule replaced the rollover rule, and the over-55 home sale exemption. The new law, at that time, continues to allow married homeowners to permanently exclude from taxation up to $500,000 of capital gains from the sale of their principal residences. Unmarried homeowners can permanently exclude up to $250,000. The treatment of tax for gains on the sale or exchange of a primary residence was overhauled as a result.

Deferred Gain on Sale of Home Replacement

The repeal of the rollover rule and replacement of it by the Home-Sale Gain Exclusion rule simplified and expanded the tax benefit. Unlike the old rollover rule, the Home-Sale Gain Exclusion rule does not make taxpayers buy a more expensive replacement residence within a prescribed period. It does not make homeowner taxpayers who used the home for rental or business purposes split the basis between the portion used as a principal residence and the part used for rental or business purposes. It does more than merely defer recognition of gain with a timely rollover. It permanently eliminates the tax on gains realized up to $500,000 for married taxpayers and $250,000 for unmarried ones.

There is an occasion when the Deferred Gain on Sale of Home rule would provide a better tax result than the Home-Sale Gain Exclusion rule. That occasion is when taxpayers sell their principal residence at a gain which exceeds the applicable exemption amount. The rollover rule would have allowed the taxpayers to defer recognition of the gains by rolling the proceeds over into the purchase of a more expensive home within two years. The Home-Sale Gain Exclusion can not offer that feature. It can permanently eliminate the tax on the exclusion amount and no more. Under the Home-Sale Gain Exclusion rule, the taxpayers are liable for income tax on the excess gains in the year of the sale.

The Home-Sale Gain Exclusion rule significantly updates and upgrades the previous $125,000 once in a lifetime capital gain exclusion for taxpayers 55 and over. It gives each married person their exemption. It allows the exclusion to be repeatedly used. One spouse is not denied the exclusion's benefit due to the other spouse's election to exclude gains for the sale of an earlier residence.

Exclusion amounts double for unmarried taxpayers and quadruple for married taxpayers. Also, the benefits are no longer reserved for taxpayers 55 and over. The exclusion is now available to taxpayers of all ages.