Monday, August 4, 2008

Capital Gains Tax Change

The new housing law changes the capital gain exclusion rulesMonday, President Bush signed the Housing and Economic Recovery Act of 2008 into law and the press jumped on the obvious storylines:

  • First-time home buyers get a $7,500 purchase "credit"

  • Conforming loan limits move to $625,000

  • Delinquent homeowners get a lifeline from the FHA

  • Local governments get federal money for buying and restoring foreclosed homes

However, tucked away on the last few pages of the text, in a section called "Revenue Offsets", there's an important tax implication. The new housing law changes the way in which capital gains exclusions are calculated on the sale of a residence.

Under the old system, a taxpayer was entitled up to $250,000/$500,000 of tax-free gains from the sale of a home if filing separately/jointly provided he lived in the residence for at least 2 of the preceding 5 calendar years.

Savvy homeowners exploited this verbiage, moving from home-to-home every 2 years to avoid paying capital gains, especially in states where the prices were rising so rapidly that they could make tens or hundreds of thousands of dollars in that short 2 year window.

The new law thwarts this tactic.

Capital gains exclusions are now calculated by taking the capital gains on the sale of the home and multiplying it by a ratio of how long a person has lived in a home, by how long that person owned the home.

In the example above, a person living in a home for 2 of 5 years would be entitled to 40 percent of tax-free gains on a home sale instead of all of it. Therefore the impact on home buyers who are not planning on relatively short term moves (under 5 years) will be minimal. Like many other of the bill's provisions, the lawmakers attempted to direct this bill to relief for the home buyer who is trying to find a place for their family, and not the real estate investor or "flipper". As always, however, it's best to talk with a qualified accountant about how tax code changes may impact you personally.

The new capital gains rules go into effect starting January 1, 2009.


Anonymous said...

Is this retroactive? How do we suggested to the law makers that the new calculation only apply to house purchased after January 1, 2009?