New capital gains exemption rules regarding converting a rental into a primary residences
September 9th, 2008 by KenricWith the capital gains exemption law regarding primary residences, investors had a great way to avoid paying taxes on some of their long time rentals properties. Here is how it would have worked:
Suppose you had SFH#1 that you bought for $100,000 in 2000, in 2006 it’s worth $200,000. You decide to make the home your primary residence in 2006, you live in it for 2 years and sell it in 2008 for $250,000. You would qualify for the 2 year primary residence capital gains exemption rule and pay no taxes on your gains.
You could move into SFH#2 in 2008 and repeat in 2010 and so on.
The Housing and Economic Recovery Act of 2008 modifies Section 121 of the Internal Revenue Code. The biggest change is that the time that your property was being used an as investment is counted against you. Therefore, if you used the home as a rental for 8 years and then moved into in for 2 years the capital gains exemption is pro-rated at 2/10 years. So if you made $150,000 on a home in this manner, only $30,000 of the gain would be exempt and you would pay capital gains on the other $120,000. This only applies to a property that was a rental prior to being a primary residence.
On a property that is a primary residence first and then becomes a rental, the rules are the same. You must have lived in it for 24 of the previous 60 months to qualify for the exemption.
The good news is that this law begins to count your rental time on January 1, 2009. So if you owned a rental since 2000, the first 9 years don’t count against your investment time.
For more information: Changes to Section 121
Posted in Real Estate | 3 Comments »
Stumble it!
Damn- What happened to GWB cutting my taxes?
Bashturd.
By knuckle_headed on Sep 9, 2008
So much for one of my exit strategies…
The attacks on the tax benefits of real estate, especially investment real estate, will only get worse. The spending addicts in Washington aren’t able to raise money through other avenues, so they go after the small investor.
At least no one is floating a proposal to eliminate the mortgage interest deduction right now. Look for that to pop up again when the market recovers.
By Another Investor on Sep 9, 2008
Wow thanks for the heads up. Its good though that I can still live in my house first, for two years, then rent it out and then I can still qualify for the exemption.
By Self Directed IRA on Sep 11, 2008