Whenever Congress tries to help us it seems someone always gets hurt. The Housing Assistance Act of 2008 (HR 3221) is one such piece of legislation. Section 3092 of this bill has a provision that will have tax consequences for real estate investors.
As most of us know, there are provisions in the tax code regarding capital gains on real estate. When we sell our personal home we get a break on the first $250,000 to $500,000 of gain depending on our marital status so long we live in the home for 2 out the last 5 years. Likewise, If you purchased a rental property you could claim the same break as long as you lived in the home for two out of the five years.
Section 3092 of HR 3221 changes all this. Future investors who use the renting and occupying strategy described above will pay capital gains based on a proration of qualifying (owner occupied) and non-qualifying (rental) usage.
To see how these rules work, let us consider a couple of examples. (Depreciation issues and sale costs will not be considered in the examples.)
Current rules: You acquired a rental property in 2003. Your basis in it is $200,000. You rent it out for three years and then occupy it as your personal residence. In 2008, five years after acquiring it, you sell for $400,000, with a gain of $200,000. (Good for you.) The total gain falls within your individual $250,000 exclusion limit and is excluded from taxable income.
New rules: You buy a property in 2009 for $300,000. You rent it out for three years and then occupy it as your personal home. In 2014, five years after acquiring it, you sell for $500,000. You, therefore have a gain of $200,000. (We are not saying this will happen in our current market... this is a scenario.) Three of the years, 60% of the ownership period, were for rental use and non-qualifying under the new law. Thus 60% ($120,000) of the gain will be taxable. Just 40% of the gain ($80,000) represents the qualified use of the property and may be excluded from taxable (capital gain) income.
The above scenario is simplistic and many variables can and may affect the actual outcome. This is why we strongly recommend you consult with a tax attorney or qualified accountant. We're really good Realtors, but the expertise of a tax pro is what you'll need to figure out your position under the new tax laws created by The Housing Assistance Act of 2008.
By the way, most of what Congress hoped to achieve through HR 3221 has already failed, but not the new tax portion which the Senate Finance Committee estimates will raise $1.394 billion over 10 years. Thank God we have our elected officials protecting us from ourselves.
Gene Urban
The Urban Team At Realty Executives
602-234-5777
