Changes to the tax code that effect rental properties:
Prior to the new Housing Reform bill of 2009, an owner of two homes could live in one and rent the other out and in order to maximize the profits from the sale of the two properties, the owner could sell their principle residence and receive a tax free gain of up to $250,000– $500,000 for married couples. They could then occupy the second home for two years, and sell it enjoying the same tax free advantage. However, the new formula is not so kind to investors–or second home owners. Here’s how it now works: If you purchased a second home after December 31, 2008 there will be “qualified” and “unqualified” usage. Any rental period of a second home prior to January 1, 2009 will be grandfathered in as qualified occupancy, but from January 1st on it’s a new ball game. Essentially the amount of tax free gain will be calculated as a percentage of the time your second home was a rental. If you owned said home for four years, and rented it out for two, then moved in, made it your principle residence and sold it, you’d be able to apply the $250,000/$500,000 tax free exclusion to the percentage you lived in the property–50%. Let’s say you bought the home for $500,000 and sold it four years later for $800,000. Prior to this new rule if you lived in the home two of the last five years you could claim it as your principle residence and enjoy a $250,000/$500,000 and so you’d pay no gain on the $300,000 profit. Under the new rules, you’re only be able to offset 50% of the $300,000 or $150,000 and the remaining $150,000 you’ll be taxed on.
Many people used loophole this to their advantage when cashing out of multiple properties. They’d move into each home–reside there for two years then sell and move into the next. It was a great way to liquidate investments or rental property from one’s portfolio while enjoying huge tax benefits. Doing away with this practice began in 2009 and this lonely bit of tax code finally managed to find a home.
“Housing bill” picture–cute huh?
*The information contained in this blog is educational and intended for informational purposes only. It does not constitute real estate tax or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.