Owners of multiple homes need to mark Jan. 1, 2009, on their calendars. That's the day that the rules change when it comes to how much profit you might be able to keep out of IRS hands when you sell.
One of the most cherished parts of the U.S. tax code is the provision that allows sellers to exclude up to $250,000, or $500,000 if they file a joint return, of profit they make when they sell their homes. Not to worry. That's still around if you own just one property and have lived in it as your primary for at least two of the five years before you sell it.
But a provision of the recently enacted Housing Assistance Act of 2008, the bill designed primarily to provide relief to some homeowners facing foreclosure, is going to cost some folks who have a vacation or other type of second property.
Under the new law, even if they convert their second piece of real estate to their primary home, they'll owe tax on part of the sale money based on how long the house was used as a second, rather than their main, residence.
How it used to work
The reason the law was changed? Money. The U.S. Treasury generally lost some every time a second home was sold by owners who took advantage of the primary-home sale exclusion.Under the old rules, if you owned your main home and a place in the mountains (or beach or wherever) that you used for family vacations, you could sell both and keep up to $250,000 (or $500,000) in profit out of the IRS hands as long as you sold them in the correct order.
First, you would sell your primary residence and pocket that profit. Then you would move into the vacation place, live there for two years and then sell it. Because it had been your primary residence, you could exclude profit from that subsequent sale, too.
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There was no limit on the number of properties for which you use the home sale exclusion. As long as you were able to make each place your primary residence and not claim the tax break for at least two years between each sale, you were in the tax clear.
How it will work
With the closure of the conversion loophole, now the seller of a second home, even if it's converted to primary residence status, will owe taxes for the time that the home was a second property after Jan. 1, 2009.You take the number of years the property was your main home and divide that by the number of total years you owned it. That gives you the percentage of time that the house was your primary residence. You can exclude that much gain, up to the $250,000 or $500,000 limits, from your taxes.