Roth & Company, PC Tax Update Blog

Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »


July 30, 2008

Once some clever tax committee staff member comes up with a tax increase idea, it tends to pop up in bill after bill until it passes. One of these ideas graduates to the tax law in the Fannie Mae bailout bill, HR 3221.

First floated last year as a revenue offset to the debt forgiveness relief for mortgage defaulters, this provision reduces the ability to exclude gain on the sale of a principal residence when the home has been rented.

Taxpayers can exclude $250,000 on the gain on a home sale ($500,000 for joint filers) if the home has been used as a principal residence for two of the prior five years. Under the old rules, this allowed taxpayers with vacation homes to move into the homes as their primary residence for a few years before sale, qualifying them for the gain exclusion.

Under the new rules, taxpayers can only exclude gain based on how much time the house served as a principal residence while they owned it.


Assume that an individual buys a property on January 1, 2009, for $400,000, and uses it as rental property for two years claiming $20,000 of depreciation deductions. On January 1, 2011, the taxpayer converts the property to his principal residence. On January 1, 2014, the taxpayer sells the house and moves out.

As under present law, $20,000 gain attributable to the depreciation deductions is included in income.

Of the remaining $300,000 gain, 40% of the gain (2 years divided by 5 years), or $120,000, is allocated to nonqualified use and is not eligible for the exclusion. Since the remaining gain of $180,000 is less than the maximum gain of $250,000 that may be excluded, gain of $180,000 is excluded from gross income.

Of course it gets more complicated. If you have used a house as a principal residence but then move out, but still sell it in the five-year period qualifying for the home sale exclusion, there is no haircut for the period it wasn't a personal residence after you moved out. Also, there is no haircut for absences up to 10 years while on active duty for the government, or for up to two years "due to change of employment, health conditions, or such other unforseen circumstances as may be specified by the Secretary."

This provision takes effect for sales and exchanges after December 31, 2008, so if you are looking to sell your vacation home in the next five years, maybe it's time to pack up and move there.


flickr photo courtesy Lance and Erin

Tags: .

 • 2008 Housing Assistance Tax Act       Bookmark: del.icio.usDiggreddit


I have owned a home for 27 years (no other) and only lived in it the first two years. So for 25 years it has been a rental. If I move in before January 1 2009, I will not be affected by this new Law, apparently. If however I decide to rent it 2 more years and then move back for two years, my tax liability will be based on a ratio starting Jan.1st which would be calculated on the time rented divided by the time owned--2 divided by 29 which is .0689 or about 7% of the profit from it's sale. If I calculate the sale profit at $200,000 that would mean that $14,000(approx.) would be added to my gross income? I am single by the way($250,000 tax exclusion).
Math isn't my strong suit. Thanks for any help you can give.

Post a comment

Email:  •  Phone: (515) 244-0266
All content © Roth & Company, P.C.  •  Powered by Movable Type  •  Site by Sekimori Design