Modification of Exclusion of Gain on Sale

[SHELLY]

I've been doing some reading on foreclosures, mortgages and such and noticed something that I haven't heard much about.

When the H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007 was signed into law, it removed the tax liabilities for the excess money forgiven by lenders or owed by folks who refi or foreclose on their homes.

To make up for the bill’s $1.97 billion impact on tax revenue over the next decade, it tightens the rules for counting a second home, vacation or rental property as a primary residence for tax purposes. Under current law, up to $250,000 (or $500,000 if married filing jointly) of the gain on sale proceeds from the sale of a primary residence are exempt from capital gains taxes.

As it stood, homeowners could claim a home as their principal residence if they have lived there two of the five years before the sale. They were able to jump from a primary residence to a 2nd/rental/vacation home, living in each 2 years, and reaping big tax benefits. That loophole is being closed.

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Modification of exclusion of gain on sale of a principle residence. The bill amends the current law exclusion of up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. Under current law, the sale of a home will qualify for this exclusion if the home is a taxpayer’s principal residence for at least two of the five years ending on the sale or exchange. This exclusion applies even if the home was initially purchased as a second home. Under the bill, if a taxpayer moves their principal residence to a second home, the taxpayer will only be able to utilize this exclusion to the extent that it relates to the period of time when the home was first used as a principal residence. The bill grandfathers use before 2008. This proposal is estimated to raise $2.005 billion over 10 years

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Inputs? Opinions?

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[Smiling JOe]

Interesting. Do they require an appraisal of the home when you convert it from second home to primary? Do they use the assessed value from the Property Appraiser? With the volatility in some areas lately, I could see people being a bit picky about when exactly they began using it as the primary residence.

[spinDrAtl]

No wording on how they are going to set the 'basis'?

[NotDeadYet]

Under the bill, if a taxpayer moves their principal residence to a second home, the taxpayer will only be able to utilize this exclusion to the extent that it relates to the period of time when the home was first used as a principal residence

I find this wording confusing. Was there an example given?

[spinDrAtl]

It sounds like they are intending to set a 'basis' for the gain. So (guessing here) let's say you bought the property in 2000 as a 2nd home for 200k. In 2008, you move into the property as your primary residence and it now worth 400k. 400k would be your basis for any future gains to exclude. So say the sowal market rebounds and in 2011 your property is worth 700k.

You grab your profit, not wanting to risk another meltdown. You could exclude 300k of profit for the time you used it as a primary residence but not the first 200k that you realized before it was your primary residence.

My guess without knowing anything else.

[Mango]

I found a description of HR 3468, and it has a couple of examples (pg.8)

Example 1.–Assume that an individual buys a property on January 1, 2008, for $400,000, and uses it as rental property for two years claiming $20,000 of depreciation deductions. On January 1, 2010, the taxpayer converts the property to his principal residence. On January 1, 2012, the taxpayer moves out, and the taxpayer sells the property for $700,000 on January 1, 2013. 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.

Example 2.–Assume that an individual buys a principal residence on January 1, 2008, for $400,000, moves out on January 1, 2018, and on December 1, 2020 (more that two years after it 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

[robertsondavies]

Shelly,

I'll keep these tax law changes in mind. I intend on having this high class problem a few years from now, should I decide to sell what I'll be buying this year.

A few years from now when I look back at 2008, the phrase I think I'll identify most fondly of

is: "Now is a great time to buy"

[NotDeadYet]

Thanks, Mango.
Those examples are very helpful.

[pk305]

Shelly/Mango, THANKS for the heads up on this and for the example...this

will have an impact on our future plans!! Had no idea about this change...better to know NOW. Appreciate your posts on this.

[Little Fish]

Ditto. I can't believe the media allowed this to go by quietly. All I ever heard was that the Bill would help those facing foreclosure. Thanks for posting.

Little Fish

[pk305]

FOLLOWING UP on this previous discussion....this proposed provision did NOT become law.

The provision of HR 3648 referred to ----

(Under the bill, if a taxpayer moves their principal residence to a second home, the taxpayer will only be able to utilize this exclusion to the extent that it relates to the period of time when the home was first used as a principal residence)

This provision WAS NOT actually passed into law. It is true that it was in the version of the bill which was introduced and passed by the House of Representatives, but it was struck out in the Senate and never made it to the final version signed into law.

[robertsondavies]

thank goodness for the Senate. we were about to move to Galts Gulch when we read the original posting by Mr. Shelly above.