Saturday, August 09, 2008

Lansner: Tax Twists in Housing Bill

by Bill McBride on 8/09/2008 01:17:00 PM

From Jon Lansner at the O.C. Register: Insider Q&A hears tax twists in housing bailout bill. Lansner interviews Leonard Wright, a San Diego-based CPA and chair of CalCPAs state personal financial planning committee:

Us: The new law has some downside for vacation or rental home owners who subsequently make the property their primary residence. Let’s say a couple buys a rental property in 2008 for $500,000. After 10 years, they move in making it their primary residence. Fifteen years later they sell it for $1.2 million, a $700,000 profit. How much could they exclude from capital gains under the new law?

Basically this affects the capital gains tax exclusion — normally $250,000 for a single filer, $500,000 for a couple — from the sale of your primary residence. The new law for the sale of a principal residence introduces the concept of non-qualified use. Essentially, non-qualified use is any period of time that the property is not occupied as the principal residence. The law now requires us to look back at the cumulative use of the property. In this case, 10 years of rental use was non-qualified use and 15 years use as a principal residence was qualified use. Since it was a principal residence 60 percent of the time (15 years/25 years), you can exclude from income $300,000 of the $700,000 profit rather than $500,000. Depreciation is also recaptured and is included in income.

For some taxpayers, there may be a break on non-qualified use. If the taxpayer was away from the residence due to official extended duty for up to a total of 10 years, or a temporary absence up to two years occurred because of an employment or health condition change, those years are excluded from non-qualified use.
This is the issue we discussed earlier. Lansner and Wright have more.