If you own a second home that someday you plan to move into, there’s something important that you need to know…
First, a little background: The Mortgage Forgiveness Debt Relief Bill of 2007 (aka HR 3648) is a bill that was created to give tax relief to those who are facing foreclosure, or have re-negotiated a mortgage. In a nutshell, people will no longer be taxed on the debt they were relieved of in their primary mortgage — this was also known as the “phantom tax,” since you were being taxed on income that you never really saw. The thought process behind this is that if you can’t afford to pay the mortgage, you certainly won’t be able to pay the taxes.
Well, to the surprise of absolutely no one, our government doesn’t give you anything for free (unless you count grief, and they give plenty of that.) So they need to make up the tax revenue that they will lose through HR 3648…(here’s where you second-home owners need to pay attention…) They have decided to recover this lost revenue from those who own second homes — here’s how:
- Under the current tax law, if you sell your primary residence you are able to shelter a big chunk of your capital gains from being taxed ($250,000 for singles, $500,000 for couples.) If you then move into your second residence and live there for at least two years, you can sell that house and repeat the same process over again. Pretty cool (and also one of the main reasons that real estate is such a great investment.)
- Now, the government has decided to change the capital gains shelter on the sale of your second home. If HR 3648 passes, you would not receive the same capital gains shelter as I outlined above. The new calculation is essentially a fraction that is determined by the number of years you lived in the house divided by the total number years you owned it. An example:
- You are a couple who owned your second home for 7 years and sold it after living in it for 3 years. Instead of being able to shelter up to $500,000 of capital gains, you would now be only to shelter 3/7 of that amount, or less than half.
Obviously, there’s a little more to this than my over-simplified example and you should contact a CPA or tax attorney if you have any additional questions. But you get the general idea that your pocket is being picked again.
There’s also a great article from BankRate.com that discusses this in a little more detail — click here: Taxing Vacation-Home Owners
I’ll post more on this topic as I research it further. But if you fall into this category, do your homework on this and know your rights!!
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