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This Change in Law May Affect Crofton Homeowners

When my Crofton clients need legal advice about a real estate matter, I refer them to Andy Levy, a partner in Goldstein & Levy, P.A, in Crofton.  I received a legal bulletin from Andy earlier this week about a change in law affecting exclusion of gain on the sale of a Primary Residence. Since it may affect some Crofton homeowners, I asked for and obtained his permission to share this information with you: 

In a largely ignored provision tucked away in The Housing Assistance Tax Act of 2008, Congress has tightened and closed, to some extent, what some believe was a “loophole” in the existing law that permits exclusion of gain ($500,000 for married taxpayers filing jointly and $250,000 for single taxpayers) on the sale of a primary residence.

The prior law provides that to be eligible for the full exclusion a taxpayer must have owned the home, and lived in it as his/her/their principal residence for at least two of the five years prior to the sale. Because of the “principal residence” requirement, vacation or second homes normally don’t qualify for the exclusion.

In what some saw as a “loophole”, the prior law permitted taxpayers to convert their second or vacation homes to their principal residence, live in it for two years, and then sell it and take the full $250,000/$500,000 exclusion available for the sale of their principal residence, even though portions of their gains were attributable to periods when the property was used as a vacation or second home and not as a principal residence.

The new law closes that “loophole” by requiring homeowners to pay taxes on gains made from the sale of a second home to reflect the portion of time the home was not used as a principal residence (e. g. vacation or rental property). The amount taxed will be based on the portion of time that the house was used as a vacation (second) home or rented out. The rest of the gain remains eligible for the exclusion, as long as the two-out-of-five year usage and ownership tests are met.

For example, if married taxpayers owned a vacation home for 10 years but lived in it as a principal residence only for the final two years prior to the sale, the maximum allowable exclusion ($500,000 for a married taxpayers) would be reduced by four-fifths (80%). Accordingly, a $400,000 gain on the sale that would be eligible for the full exclusion under the pre-Act law would be reduced by 80% to $80,000, rendering $320,000 of the gain subject to taxation.

Fortunately, the new law is not retroactive and the new restrictions apply only to sales after 2008. In addition, any periods of personal or rental use before 2009 are ignored in applying this new provision and the changes do not affect the rule that allows the homeowners to take advantage of the home sale exclusion every two years.

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This bulletin is for general, informational purposes only and does not constitute advice with respect to any specific or contemplated transaction.  All recipients are advised to seek the advice of a tax advisor to determine the ramifications of the referenced statutory provisions on a pending or contemplated transaction.         8.20.08

Please join me in thanking Andy Levy for this information.  It’s one of those details of the Housing Assistance Tax Act of 2008 that I haven’t seen in the print media, and yet it may affect YOU. 

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