Bill Tightens Tax Rules for Second Homes

Here is an article taken from www.realtrends.com regarding new legislation just approved that could affect owners of vacation homes or investment property, which are quite prevalent in our community.

Popular legislation to ease the tax burden on struggling homeowners could hit an unexpected constituency: people with second homes. The Ways and Means Committee, the House's tax-writing panel, approved a bill last week under which homeowners facing foreclosure won't get stuck with a tax bill if part of their debt is forgiven by lenders. Currently, forgiven debt is treated as income to the borrower and is subject to tax.

The committee decided to pay for the tax break, as required by congressional budget rules, by restricting homeowners' ability to avoid or reduce the taxes on the sale of second homes. The gain in revenue would be equal to roughly $2 billion over 10 years.

Under current law, a person can exclude from taxes up to $250,000 in capital gains on the sale of a principal residence. Up to $500,000 of gains can be excluded for married couples. A second home can become a principal residence as long as the taxpayer has lived there for two of the previous five years. The bill approved yesterday would change those rules. Under it, the size of the tax break for a second home would be tied to the portion of time, out of all the years a house is owned, that it serves as a principal residence. Living in a property longer would result in a larger tax break on any gains when it is sold.