New tax rules could cost 2nd-home owners"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.
The
new second-home sale law also grants an exception for "nonqualified
use," or any time when the home wasn't your principal residence, if the
house's original use was as your main home. A period of absence
generally counts as qualifying use if it occurs after the home was used
as the principal residence.
This exception could come in handy, for example, if
you moved but were unable to sell your home because of a slow real
estate market. Although technically the property is no longer your
main home, since it started out that way, you don't have to factor
out that nonresidential time, or nonqualifying period in tax-speak,
when you do eventually sell and realize a gain, says Scharin. Of
course, you do have to meet the other home sale exclusion rules,
such as living in the home as your main residence for two of the
five years before the sale.
A new loophole
The special tax status granted to homes that started out as principal
residences, regardless of how the property is used subsequently, also
creates a new tax loophole.
There's a way, says Olivieri, that current owners of both a primary residence and a vacation home can sell the properties
and claim the full tax exclusion amount for both. He offers this example:
You
have two homes, one clearly a primary residence and the other clearly a
vacation home. In 2009, you move out of your principal residence and
into your vacation home. You don't have to sell your original principal
residence yet, just move out of it.
Live in what once was your vacation house, but now
your main home long enough to meet the two-year residency rule, then sell it and claim the full gain exclusion.
Remember, if you have a gain in excess of the $250,000 or $500,000
exclusion amount, you still owe tax. But there's nothing to prorate
because you converted it on the new law's effective date.
When
you move back to the original primary residence, you can sell it and
claim the full exclusion as long as you meet the tax rule that didn't
change: You live in it as your main home for two of the past five years
before the sale. You can't move in after 20 years, sell the next day,
and get the full exclusion.
"You
don't have to prorate the exclusion to any period that it was not your
primary residence if that period occurred after a period when it was
your residence," says Olivieri. "It is a new loophole, but one that was
intentionally done."
Updated: Feb. 5, 2009 Page |
1 |
2 |
3 |