Capital gains
Second-home tax rules to change

John Olivieri, however, thinks the new law will raise much less than that.

"Just look at the state of housing market right now," says Olivieri, partner with the New York City law firm White & Case. "How many gains are there out there?"

Olivieri also believes that Congress might be counting too much on folks who own more than just two properties. "Before, if you owned four residences, you could sell the one you used as principal residence, claim the gain exclusion, move into residence number two, live there for two years, sell and claim the gain exclusion and just keep going through your properties this way," he says.

"The only people who rally benefited from this application of the law in a way that legislators apparently found unjust was people who already owned all these residences and converted them to avoid tax on the gains," Olivieri says. "That's not a lot of people. Owning one vacation home is common. Owning a bunch is not."

Real estate investment side effect
Folks who do buy second homes, which the National Association of Realtors says account for around 40 percent of all homes sales, will need to think about more than how much fun they'll have at the new place. The future tax implications, says Mark Luscombe, principal tax analyst with tax publishing company CCH, may complicate planning for people looking at a second home.

"It may also have the effect of depressing the market for vacation property, something that legislators may not have intended," Luscombe says.

One congressman is bothered by that possibility. "The damage caused by raising taxes on second-home owners won't appear immediately," says Rep. Kevin Brady, R-Texas, whose East Texas district includes several recreational lakes dotted with second homes.

"I am concerned that in the long run, this tax increase could hurt the resale value of second homes," says Brady, "making them less attractive as an investment and possibly damaging the local economies of retirement and vacation communities."

Timing is everything
The tax considerations of vacation-home owners, in Texas and across the rest of the United States, are part of the second reason why the change in the home sale law might not raise as much money as lawmakers had hoped.

People tend to alter their behavior to fit their needs, especially when taxes are involved. "They'll just hold onto the houses until death and the basis will be stepped up for their heirs, who can sell for no capital gains," Olivieri says.


If you prefer selling rather than leaving your vacation home to the kids, you still might be able to work out a tax-free sale situation.

The sale profit allocation formula only applies if you convert a second home to a primary residence on or after Jan. 1, 2009. "If you convert before the effective date," Scharin says, "there's no effect."

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