Economic & Housing Law: Capital Gains Reform

There has been a lot of buzz lately about new regulations, in particular, the Economic anf Housing Law.  It’s a lot to keep up with, so here are the highlights of the Capital Gains section:

Changes to Capital Gains Tax Relief Laws – Before, any homeowner who lived in a home for 2 of the past 5 years could enjoy up to a $250,000 profit tax-free (up to $500,000 for married couples).

Beginning January 1, 2009, this changes to a ration.  Now, you must use this equation:  Captital Gains Exclusion = Profit from sale of home = # of days the home was primary / # of days the home was owned. In simple terms, that means that if you live in the home 100% of the time, you can enjoy your profits capital gains free, otherwise you may need to split the difference with the government.

For example, let’s say you purchase a home for $300,000 on September 1st of this year.  You live in the home for 1.5 years, then rent it out for a year, then move back in for an additional 6 months.  You sell the home 3 years after you purchased it for $500,000.

Profit = $200,000
# of days the home was primary = 730 Days
# of days the home was owned = 1095 Days
730/1095 = 2/3 = Amount of the profit that is Capital Gains Free = $133,333.33

In this example, you would pay Capital Gains taxes on 1/3 of the profit or $66,666.67     The federal portion of the Capital Gains tax is currently 15%, so the owner of this example would owe $10,000 to the federal government for this profit.  Sure beats $30,000, but this may entice you into not hopping from one of your rental properties to the next and selling them after living in them for two years instead.

A benefit to this reform is the ability to claim an exemption on more than $250,000 per person.  Many say this is a benefit to the rich, but as a proponent of flat taxes (and an opponent to any socialist-type laws), I am in favor.

Related posts:

1. The New Stimulous 2009 Federal Housing Tax Credit
2. In The News: The Healthiest Housing Markets for 2009
3. Housing starts expected to rebound slowly