A change in the Housing Assistance Tax Act of 2008 changed the rules regarding capital gains on the sale of a primary residence. Under the prior system, homeowners were able to exclude up to $250,000 ($500,000 for married couples) worth of capital gains on the sale of a primary residence. One of the rules in order to qualify for the capital gain exclusion was that a property owner had to use the real estate as a principal residence for at least two of the previous five years. As such, homeowners with rental and vacation property began to sell their primary residence without capital gain and then moved into their second home or rental property so that they could avoid capital gain upon sale of that property also.
The Housing Assistance Act of 2008 sought to close that loophole. The new law will allow the exclusion of a portion of the capital gain based upon a new formula that seeks to take into account years that the real estate was not used as a primary residence. Use of the real estate as a primary residence has been termed "qualifying use" and use of the real estate for other purposes is called a "non-qualifying use".
Beginning on January 1, 2009, capital gains are determined based upon the following formula:
(Time of non-qualifying use after 1-1-09) divided by (time of total ownership) = % of exclusion
One benefit here is that non-qualifying use for periods before January 1, 2009 do not count for purposes of making the calculation. Obviously, properties that have been used exclusively as a primary residence will be eligible to exclude the entire gain up to $250,000 ($500,000 for married couples).
As a result, property owners who have held non-primary residence real estate for long periods of time can still take advantage of major tax savings by converting non-qualified property into qualified property (because all non-qualifying time prior to 1-1-09 is not included). It makes sense to evaluate capital gains strategy based on this law.
