fyi! New bill ends $250/$500K exclusion for 2nd homes
Excerpt:
Obviously this will slam the market for second homes. Vacation home areas will likely be hit pretty hard. Congress really should have done this 5 years ago before the bubble. In fact, the existence of this tax break was an important factor promoting the real estate bubble. Congress fed the bubble, and now it's going to feed the bust.
In the very long run, inflation will continue to erode the value of the non-indexed $250k/$500k exclusion to the point where everybody is paying big taxes when they sell a home, not just the affluent. My advice: find a house you really like and move soon. You might not be able to afford to move 10 years from now due to the income tax hit. ______________________________________________________________
FAT WALLET forum:
myf16 - Senior Member 1K Date Posted: Sep/27/2007 11:39 AM Rating: +27 ______________________________________________________________
HR 3648 contains a revenue-raising provision slamming the door on real estate investors planning to take advantage of the $250k or $500k (single or joint return respectively) capital gains exclusion. I expect this provision to be enacted more or less intact.
Essentially, the proposal eliminates double-dipping on the $250k/$500k exclusion, something that investors in second and third homes had been doing in recent years. The would buy a second home, fix it up, move into it for 2 years (or just pretend to do so) then sell it for a tax-free gain. They would sometimes own several homes, selling one every 2 years this way. This description should sound familiar to some FWers.
Under this proposal, you can still "home hop" with full tax exclusion if you only own one home at a time. If you own two homes, the 2 years you spend qualifying for the exclusion on one home will subtract from your exclusion on the other home. This is how Congress eliminates double dipping.
Obviously this will slam the market for second homes. Vacation home areas will likely be hit pretty hard. Congress really should have done this 5 years ago before the bubble. In fact, the existence of this tax break was an important factor promoting the real estate bubble. Congress fed the bubble, and now it's going to feed the bust.
In the very long run, inflation will continue to erode the value of the non-indexed $250k/$500k exclusion to the point where everybody is paying big taxes when they sell a home, not just the affluent. My advice: find a house you really like and move soon. You might not be able to afford to move 10 years from now due to the income tax hit.
-------------------------------------------------------------------------------- Under the proposal, gain from the sale or exchange of a principal residence allocated to periods of nonqualified use is not excluded from gross income. The amount of gain allocated to periods of nonqualified use is the amount of gain multiplied by a fraction the numerator of which is the aggregate periods of nonqualified use during the period the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property.
A period of nonqualified use means any period (not including any period before January 1, 2008) during which the property is not used by the taxpayer or the taxpayer's spouse or former spouse as a principal residence. For purposes of determining periods of nonqualified use, any period after the last date the property is used as the principal residence of the taxpayer or spouse, and any period (not to exceed two years) that the taxpayer is temporarily absent by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances, are not taken into account. The present-law election for the uniformed Foreign Service and employees of the intelligence community is unchanged.
If any gain is attributable to post-May 6, 1997, depreciation, the exclusion does to that amount of gain, as under present law, and that gain is not taken into account in determining the amount of gain allocated to nonqualified use.
The provisions of this proposal may be illustrated by the following examples:
Example 1.–Assume that an individual buys a property on January 1, 2008, for and uses it as rental property for two years claiming $20,000 of depreciation deductions. January 1, 2010, the taxpayer converts the property to his principal residence. On January 2012, the taxpayer moves out, and the taxpayer sells the property for $700,000 on January 2013. As under present law, $20,000 gain attributable to the depreciation deductions in income. Of the remaining $300,000 gain, 40% of the gain (2 years divided by 5 years), $120,000, is allocated to nonqualified use and is not eligible for the exclusion. Since remaining gain of $180,000 is less than the maximum gain of $250,000 that may be gain of $180,000 is excluded from gross income.
Example 2.–Assume that an individual buys a principal residence on January $400,000, moves out on January 1, 2018, and on December 1, 2020 (more that two years was last used as the principal residence) sells the property for $600,000. The entire $200,000 gain is excluded from gross income, as under present law.
Effective Date
The proposal is effective for sales and exchanges after December 31, 2007.
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