The premise of this tax change is to allow people to choose the type of housing they want without worrying about the tax consequences. Homeowners who sell their principal residence on or after May 7, 1997 escape federal capital gains taxes on their profits, up to the new maximum amounts. Since there is no requirement to roll over proceeds and reinvest, homeowners now have the option to trade up or down on a tax-free basis. Here are the details:

• Couples filing a joint tax return can take up to $500,000 in home sale gains, tax-free, provided the property was their principal residence for two of the five previous years.
• Single filers, even if married, can take up to $250,000 of gain without capital gains taxation.
• Even those 55 and over who took advantage of their one time $125,000 exemption can benefit again.
• Capital gains exemption can be taken up to every two years, provided the homeowner lives in the property for two of the past five years.
• If the homeowner hasn'satisfied the two year minimum, the capital gains may be taxed on a sliding scale depending on how many months the homeowner has lived in the house and if the reason for moving is a new job, health, or unforeseen circumstances that will be specified in the regulations.
• Documented improvements to the home may also be used to offset the profit, if you are over the $500K/$250K allowances.
• Taxes paid on capital gains were cut from 28% to 20% (to 10% in the 15% tax bracket).

Penalty-Free Withdrawals From IRAs to Assist First-Time Homebuyers

New law allows penalty-free withdrawals from IRAs for up to $10,000 for first-time homebuyers. Withdrawals can be made from existing IRAs beginning January, 1998. A first-time homebuyer is defined as anyone - single or couple - who has had no ownership interest in a home during the previous two years. Withdrawals from IRAs of spouses, parents, grandparents, or certain other relatives are all eligible, but can total no more than $10,000.

Capital Gains Reductions and Depreciation Recapture for Investment Real Estate

The top tax rate for capital gains drops from 28% to 20% (25% on the portion depreciated). For those in the lowest bracket, it falls from 15% to 10%, effective May 7, 1997.

Tax-Deferred Real Estate Exchange

No changes to this already popular law. Investors can pay zero tax in capital gains when they dispose of property that has increased in value and purchase "like kind" real estate of equal or greater value.