|
Rules Changed for Capital Gain Exclusion for Second Homes
The recently-enacted Housing and Economic Recovery Act of 2008 provides the housing market with important incentives, including the new first-time home buyer tax credit. (For comprehensive information on how prospective home buyers can use the credit to their advantage, visit the special NAHB Web site: www.federalhousingtaxcredit.com.
However, the legislation also includes a change to the capital gain exclusion rules for second homes that is effective for sales after Dec. 31, 2008.
Under prior law, home owners could exclude from taxation up to $500,000 ($250,000 for single taxpayers) of capital gain from the sale of a principal residence in which the taxpayer must have lived for at least two of the five years before the home was sold.
Since it was established in 1997, this tax exclusion has been beneficial to home owners, saving taxpayers $28.5 billion in tax year 2007 alone, according to the congressional Joint Committee on Taxation.
The new law narrows the existing exclusion for owners of second homes. Home owners who own only one home are not affected at all by the new rules and may continue to exclude up to $500,000 or $250,000 in gain from the sale of their principal residence.
Under the change in the housing legislation, taxpayers must continue to meet the existing test of living in the home for two of the five years preceding the sale, but the maximum amounts that can be excluded from taxation are reduced proportionately by the number of years in which they owned the home but did not occupy it as a primary residence.
For example, suppose a taxpayer purchases a second home on Jan. 1, 2009 and sells it 10 years later on Jan. 1, 2019, using it as a primary residence only during 2017 and 2018. The two-of-five year test has been met, but because the home was only used as a primary residence for 20% of the total ownership period (two of the 10 years), the $500,000 ($250,000) gain exclusion cap is reduced by 80% to $100,000 ($50,000).
NAHB insisted on important grandfathering exceptions for existing owners of second homes. Under these exceptions, any time period of ownership prior to Jan. 1, 2009 is treated as a period of primary residency for the purpose of calculating the nonqualified use.
For example, suppose a taxpayer purchased a second home on Jan. 1, 2005 and sells the residence on Jan. 1, 2015, using the home as a primary residence only during 2013 and 2014. Unlike the previous example, in which the taxpayer could only qualify for two years of using the home as a principal residence, under the new law’s grandfathering rule six of the 10 years qualify for the tax exemption — 2005, 2006, 2007 and 2008, as well as 2013 and 2014. The taxpayer is able to exclude up to 60% (six of 10 years of qualified use) of the $500,000 ($250,000) gain exclusion amounts, or $300,000 ($150,000.)
There are other exceptions to how the law defines nonqualified use; most notably, any period of ownership within the five-year window after the two-year test has been satisfied can be considered a period of qualified principal residence use. For example, if a home is used as a primary residence in 2010 and 2011, then years 2012 through 2014 are treated as years of primary residency even if the home was used for other purposes, including rental or vacation property.
Congress made these changes to the principal residence gain exclusion for two reasons.
First, for some time there was a desire to tighten the gain exclusion rules so that they applied only to owner-occupied principal residences and not to homes held primarily as rental property, which thereby received an unfair tax advantage over other owners of residential rental property, including multifamily developers. The provision was almost included in the Mortgage Forgiveness Debt Relief Act of 2007, which exempted from tax mortgage forgiveness amounts or interest rate reductions on a principal residence.
Second, congressional leadership insisted on making the Housing and Economic Recovery Act of 2008 revenue neutral.
The change to the principal residence gain exclusion rules was one of many revenue-raising provisions included for this purpose and needed to enact the landmark housing stimulus package. The provision raises approximately $1.4 billion over 10 years — about 0.5% of the tax expenditure of the prior rules.
For more information, e-mail Robert Dietz at NAHB, or call him at 800-368-5242 x8285.
Attend the NAHB Construction Forecast Conference
Don't miss NAHB's 2008 Fall Construction Forecast Conference and Webcast for the latest economic news about the housing industry.
Join NAHB on Oct. 22 in Washington, D.C., where the country’s leading economists and finance experts will provide insight into the uncertainties of the housing market.
To register for the conference or Webcast, and to see the full conference agenda, visit www.nahb.org/cfc.
 Want to Know the Housing Forecast for the Top 100 Metros?
Find out in HousingEconomic.com’s 2008 to 2009 Metro Forecast (free preview).
Get the metro forecast with in-depth analysis, overviews and downloadable Excel tables.
To learn more, visit www.HousingEconomics.com.
 Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.
|
