Congress Limits Gain Exclusion on the Sale of Some Primary Residences

When Congress passed the Housing Assistance Act of 2008 a few months ago, their goal was to help those people who were losing their homes in foreclosure. One of the side affects of the bill, however, was a change that could effect taxation on the gain from the sale of your personal residence.

IRS law excludes $250,000 of the gain from taxation if you're single, and $500,000 if you're married, when you sell a primary residence you've lived in for at least two years of the last five years. This is so even if a portion of the gain was rolled over into the property in a 1031 exchange transaction.

The new law modifies that rule and penalizes you for time that your property is not your primary residence; you have to prorate the gain between the periods the property was not your primary residence, and the periods that it was. (Your primary residence is the place you live; the address you use on your drivers license; where you're registered to vote, etc.)
The new law only covers those situations where the period when the property was a rental or vacation home falls before it becomes your primary residence. It does not cover situations where it was your residence first, and then became a rental property – this was done so that homeowners who were forced to rent their former residence while they tried to sell it would not be penalized.

As time goes on, we'll have lots of questions about this new law that will have to be answered by court cases or IRS rulings (such as what happens if you build a house on a piece of bare land that you've owned for years?), but my advice is that if you are planning to move into your current rental or vacation property at some point in the future, you should do so as soon possible.

For more information contact bill.swanson@cbshome.com or visit www.billswanson.com.