What the capital gains tax law means to you.

Although the Taxpayer Relief Act of 1997 was put into effect almost a year ago, many homeowners still misunderstand the new law. The Taxpayer Relief Act of 1997 changed the way real estate capital gains taxes are calculated, allowing new opportunities in certain cases for sellers to take advantage of today's hot real estate market and retain more of their gains.

Previously, in order to avoid capital gains taxes, sellers had to roll over all their net proceeds from a sale of a principal residence into a new principal residence bought within two years. Any portion of a gain earned on a sale that was not re-invested in a new property was taxable. The only exception was a one-time gain exemption of $125,000 for people who were at least 55 years old.

The new capital gains tax law no longer requires this rollover into new property in order to keep the entire gain earned from a sale. Now, for couples filing jointly, any gain up to $500,000 is not taxable, regardless of whether the gain is rolled over into a new property. Singles are exempt for gains up to $250,000. These new laws take the place of the former rollover policy and over-55 exemption. And just to spell it out, sellers can no longer roll over their gains of over $500,000 in order to avoid capital gains taxes.

To qualify, the property sold must have been the seller's principal residence for at least two years in the five-year period prior to the sale. Certain allowances are made for situations where health, place of employment or other factors prevent someone from maintaining the principal residence for the required two years.

The seller may choose to abide by the previous laws in cases where the home was sold prior to August 6, 1997, (or after if a binding contract was initiated before that date).

Here is how a sample sale might look under the new law: Current sale price of home: $1.3 million; Original cost of home: $400,000; Gain on the sale: $900,000; Exclusion for couple filing jointly: $500,000; Taxable gain: $400,000; Tax rate: 20 percent; Tax: $80,000.

A second example shows a gain that is not taxed because it falls within the tax exclusion range: Current sale price of home: $1.5 million; Original cost of home: $1 million; Gain on the sale: $500,000; Exclusion for couple filing jointly: $500,000; Taxable gain: $0; Tax rate: 20 percent; Tax: $0.

For most people nationwide, this new law is a boon and a tax-free gift. If a property that was used as a principal residence increases in value, a single person gets a $250,000 tax-free gain and a married couple gets a $500,000 tax-free gain on its sale. This can be done every two years. As a high percentage of sales will fall into this category and be exempt from capital gains taxes, it is expected to be an advantage to current and future sellers, cutting down on tedious record-keeping.

However, Manhattan, as ever, is an exception. It is one of few places in the country where increases in value can easily outstrip the $500,000 tax-free margin between buying and selling prices. Therefore, people who have made a gain over $500,000 will not benefit entirely from the new law. This is exacerbated by the fact that a rolled-over untaxed gain under the old law reduced the tax cost of the replacement property. Those who have rolled over gains in the past may find the tax cost on their current homes so low that it throws the gain from a current sale well over the $500,000 threshold.

The law has had some effect an the real estate market in New York, causing more people to place their properties on the market now in order to cash-in while their gains are still below the $250,000 or $500,000 mark. However, not as many properties were put on the market as brokers originally anticipated This simply proves that the decision to sell should not be based on capital gains issues alone. Sellers often have an emotional tie to the place they are selling, and they should decide to sell only when they believe the time is right.