The federal housing bill just passed contains mostly provisions designed to help taxpayers. Here's one which does the opposite.
Currently, taxpayers are allowed to exclude up to $250,000 ($500,000 on a joint return) of gain from the sale of their principal residence. Generally, you must own and occupy the residence for at least two of the five years preceding the date of sale. A reduced exclusion is permitted for taxpayers who meet certain unforeseen circumstances.
Under the new law, taxpayers will not be allowed to exclude any gain attributable to a "nonqualified use." A period of nonqualified use is any period after January 1, 2009 during which the property is not used as the principal residence of the taxpayer, the taxpayer's spouse, or former spouse.
This rule will affect taxpayers who sell a principal residence which was previously a vacation home or rental property, for example. If there is a gain on the sale, they will owe some amount of tax, even if they meet the two-out-of-five years ownership and use tests. The amount of gain taxed will be based on a percentage arrived at by dividing the nonqualified use time by the total period of property ownership. (Note that for rental properties, tax will also be owed on the amount of allowable depreciation. This is prior tax law and remains unchanged.)
Since the definition of a period of nonqualified use doesn't include any period before January 1, 2009, a taxpayer can avoid this new rule if he moves into another residence he owns and makes it his principal residence before January 1, 2009.
Posted on 2008-08-14 06:32:52