Released: August 09, 2008

Bill would narrow second home tax loophole

Source: Kenneth Harney, Washington Post

Deep in the nearly 700 pages of the new housing bill is a complicated change in the tax code that could affect substantial numbers of people who purchase second homes or investment real estate in the coming decade with an eye to occupying those homes as their main residence later.

The bill narrows the use of the code’s tax-free exclusion that allows sellers of principal residences to escape taxation on the first $500,000 of their profit (married joint-filers) or $250,000 (single-filers). Under current law, sellers can claim the full exclusion if they have used a property as their principal residence for at least two of the five years preceding a sale.

They can claim the exclusion even if they convert an investment property or vacation house into their principal residence and live there for at least two years. This flexibility has been a boon to many tax-wise owners of multiple houses—particularly during the bubble years when values doubled in some parts of the country.

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