Santa Cruz Real Estate Experts Team Sedenquist

Congress is working to provide some relief to homeowners facing foreclosure.  And they have to fund all these tax breaks they’re handing out.  So they’ve closed one of the largest remaining tax loopholes that smart homeowners have been using; the ability for a married couple to take $500,000 in profit when you sell a second home without paying any capital gains tax.  This is a big change for those fortunate enough to own multiple homes who planned to move into each of the properties as their primary residence for two years, then sell it and take the gain.  Here is how this new change will work.

Second Home Conversion Tax Offset

• One of the offsets included in H.R. 3221 was the closing of a tax loophole concerning the conversion of a second home to a primary residence and the capital gains exclusion.  This offset ONLY applies when a second home is converted to a primary residence and does not affect the capital gains exclusion when a home has only been a primary residence.
• The loophole allowed it so that if a second home was converted to a primary residence and was used as such for at least two out of the previous five years; the homeowner could use the $250,000/$500,000 capital gains exclusion. 
• H.R. 3221 closes that loophole and will now only allow the capital gains exclusion to apply to gain received once the house became a primary residence
• Any gain earned prior to January 1, 2009 would be affected by this provision and there are some exclusions of this policy for extended military service (with limitations) as well as change of employment, health conditions or other unforeseen circumstances (not to exceed an aggregate period of two years). 
• There is also an allowance of 5-years of gain if a property is converted from a principle residence to a second home.
• The new formula to calculate the gain allowed to be included in the capital gains exclusion would be: Profit from the sale multiplied by the number of days the home was a primary residence over the number of days the home was owned.

Share or bookmark this page: