Capital Gains Tax

WASHINGTON--The biggest unanswered question facing American homeowners at tax time this year might strike you as odd: What is an "unforeseen circumstance" and how can you claim one to avoid capital gains taxes on a profitable home sale? That question has been pending before the Internal Revenue Service for more than a year with no answer in sight. Yet the issue has potentially large financial significance for anyone who has resold a home at a profit after occupying it for less than two years.

The Bush Administration today defended its proposed capital gains tax cut as an important tool for economic growth, but key senators questioned whether it would feed an impression that the tax laws are unfair. Sen. Lloyd Bentsen (D-Tex.), chairman of the Senate Finance Committee and a longtime backer of a lower capital gains tax, offered another reason for skepticism.

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) conceded defeat Wednesday in his effort to forge a compromise on reducing the capital gains tax, clearing the way for approval of a proposal supported by President Bush to cut the tax on investment profits over a 2 1/2-year period. The panel is likely to vote today, lawmakers said, in favor of a measure championed by Rep. Ed Jenkins (D-Ga.

President Bush won a major victory on one of his key campaign issues Thursday as the House voted by a surprisingly wide margin of 239 to 190 to cut the capital gains tax rate sharply. In a dramatic showdown that had been expected to produce a close vote, the House defeated a Democratic alternative that would have raised taxes on the wealthy and expanded the availability of deductions for individual retirement accounts.

President-elect George Bush, despite his frequent promise on the campaign trail to reduce taxes on capital gains, is likely to postpone a formal proposal out of fear that it would encourage Congress to begin wholesale tampering with the tax code, a senior Bush adviser said Monday.

Congress appears ready to give President Bush the benefit of the doubt on his controversial plan for cutting capital gains taxes, possibly approving a reduction of some sort before the end of the year, congressional strategists said Wednesday.

The House Ways and Means Committee, in a major victory for President Bush and a defeat for the Democratic congressional leadership, narrowly agreed Thursday to a plan that would sharply cut capital gains tax rates through the end of 1991. Under the proposal, profits on investments from the sale of stock, real estate and most other assets would be taxed at a maximum rate of 19.6%, contrasted with today's top rate of 33%.

Get ready. The nation's already confusing capital gains tax laws are about to get muddier, thanks to a 1997 law that finally goes into effect at the beginning of 2001. On the bright side, the capital gains rate for long-term holdings of certain assets is declining by 2 percentage points. By working the law to your advantage, however, you could save considerably more than that relatively small percentage indicates. The bad news is that the law is complex.

Q If you sell your home for a profit and do not know whether you will buy another home, are you better off paying the capital gains taxes immediately or waiting until the two-year replacement period lapses? Does the government charge you interest on the capital gains tax that should have been paid in the year the home was sold? What about state taxes? -- G.D.S.