Capital Gain Exclusion on the Sale of a Residence
The Taxpayer Relief Act of 1997 repealed the requirement that a taxpayer must reinvest the gain received from the sale of a principal residence within two years to avoid paying a capital gain income tax. The law also repealed the one time exclusion of up to $125,000 for a capital gain received by a person 55 or older. The law applies to the sale of a principal residence after May 6, 1997.
The Taxpayer Relief Act of 1997 permits a single taxpayer to exclude up to $250,000 of the gain received on the sale of a principal residence provided the taxpayer has owned the residence for at least five years and has used it as a principal residence for at least two of the past five years. This exclusion increases to $500,000 for married couples who meet this requirement.
A taxpayer who cannot meet these new requirements because of a change of employment or a disability is able to exclude a portion of the taxpayer’s capital gain earned on the sale of a residence.
Florida Documentary Stamp Tax
A documentary stamp tax must be paid to the clerk of the circuit court in the county where a parcel of real property is located before a deed transferring the ownership of that real property can be recorded in the official records of the clerk of that court. This tax is presently $.70 for each $100 of the amount paid for the real property. Thus, the sale of a home for $70,000 will give rise to a transfer tax of $490 payable to the state of Florida.
Though the contract for purchase and sale of this real property can provide otherwise, it is customary for the contract to require the seller of the real property to pay for the documentary stamps. The seller normally pays the documentary stamp tax because the seller is expected to deliver a deed that is marketable.
It is customary for the contract for purchase and sale of real property to provide that the buyer will pay the documentary stamp tax relating to the issuance of a promissory note given to borrow the money necessary to pay a portion of the purchase price. This documentary stamp tax for the privilege to issue a promissory note is $.35 for each $100. This means that if the seller accepts a promissory note from the buyer for $50,000 of the purchase price, the documentary stamp tax that the buyer will pay to the clerk of the circuit court will be $175. Likewise, if the buyer borrows some of the purchase price from a third party such as a bank, the buyer will pay this documentary stamp tax to the clerk of the court for the promissory note he or she gives to the bank.
Since the seller or the lender will want the repayment of the promissory note to be secured by a mortgage constituting a lien on the real property, there is an additional intangible tax that must be paid for the privilege of giving a mortgage. Although this one time nonrecurring tax is the obligation of the lender, the lender will demand that the borrower pay the intangible tax. The intangible tax on a mortgage is paid to the clerk of the circuit court when the mortgage is recorded in the official records. The intangible tax is presently two mills per dollar, or $2 per $1,000, on the exact dollar amount of the new mortgage. So if the buyer gives a mortgage to secure the repayment of a $50,000 promissory note, the intangible tax will be $100.
The seller of real property or a person offering real property to secure the repayment of a loan will be required to pay for title insurance. The purpose of title insurance is to reimburse the buyer of the real property or the owner of a mortgage against a loss in case the title to the property is later determined to be defective or invalid. A new title insurance policy is issued when the present owner sells or refinances the real property even if that owner received a title insurance policy from the previous owner. This is because the coverage provided in a title insurance policy extends only to the owner who is being insured at the time of that particular closing. Thus, an owner’s title insurance policy cannot be assigned to the next buyer of a parcel of real property.
This page is excerpted from the Florida Senior Legal Guide.