The Taxpayer Relief Act of 1997 significantly changed the tax treatment of capital gains.
Lower Rates
The top tax rate on long-term capital gains has been reduced:
- 20% Rate: For taxpayers in the 28% bracket or higher (down from 28%).
- 10% Rate: For taxpayers in the 15% bracket (down from 15%).
These lower rates generally apply to assets held for more than 18 months (later revised to 12 months by the 1998 Act).
Real Estate
For depreciable real estate (Section 1250 property), the portion of the gain attributable to depreciation is taxed at a maximum rate of 25%.
Home Sale Exclusion
One of the biggest changes is for homeowners. You can now exclude up to $250,000 (single) or $500,000 (married filing jointly) of gain from the sale of your principal residence. To qualify, you must have owned and lived in the home for at least two of the five years before the sale.