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Deferred Gain On Sale Of

Home
By JULIA KAGAN | Updated May 1, 2018

Deferred Gain on Sale of Home, repealed in 1997,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." [1] ​

Deferred Gain on Sale of Home was replaced with

the Home-Sale Gain Exclusion rule.

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Breaking Down 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The Taxpayer Relief Act of 1997 repealed the rollover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. [2] ​

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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. [3] ​

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. [4] ​

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. [4] ​

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Related Terms
What Is the Over-55 Home Sale
Exemption?
Learn more about the over-55 home sale exemption, which
provided qualified homeowners with a one-time tax break.
more

Principal Private Residence (Canada)

A principal private residence is a home in which a Canadian
taxpayer or family maintains its primary residence. more

Amount Recognized Definition

Amount recognized is income or loss you must report on
your tax return or on a financial statement. more

Principal Residence Definition

A principal residence is the main home that a person
inhabits and uses for the majority of the time. more

Main Home Definition

Main home is a term used by the Internal Revenue Service
(IRS) to define a taxpayer's primary home. more

Homestead Exemption
A homestead exemption protects the value of a home from
property taxes and creditors following the death of a
homeowner spouse. more

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