Re: New Capital Gains for primary residences 2009 - Posted by Dave T
Posted by Dave T on October 30, 2009 at 18:07:46:
Yes, there are recent changes to the tax codes that apply to the income tax treatment when a primary residence is sold.
Before these changes, a homeowner who both owned AND occupied his home as his primary residence for two of the five years prior to sale could exclude up to $250K of profit per taxpayer from capital gains taxes.
One rule change applies to a primary residence that was acquired as the replacement property in a 1031 exchange then converted to a primary residence. For this property, the sale profit can still be excluded from capital gains taxes provided the taxpayer has both OWNED his home FIVE years prior to the sale and occupied the property as his primary residence at least two of the five years prior to the sale.
The more recent change in the tax code went into effect in January 2009. The $250K maximum capital gain exclusion per taxpayer is still in effect if the taxpayer satisfies the two year ownership and occupancy requirements. But, now the profit on the sale must be allocated between periods of qualified and non-qualified use.
Before the rules change, you could vacate your primary residence that you had owned and occupied for the previous four years and convert it to a rental property for two years before the property is sold. All of the sale profit due to appreciation would still be eligible for the capital gains exclusion subject to the $250K limit.
Under the rule change, the period of rental use from Jan 1, 2009 until the property is sold is now a non-qualified period. The portion of the sale profit attributed to the period of non-qualified use is a taxable capital gain, while the portion of the sale profit attributed to periods of qualified use is still excluded from capital gains taxes.
In my example, the homeowner bought the property and occupied it as his primary residence for four years. During the next two years the property was in service as a rental. Finally, after six years of ownership, the property is sold. The homeowner meets the two of five year requirement to exclude his “qualified use” sale profit from capital gain.
Two of the six years of ownership (33%) are non-qualified use, and therefore, 33% of the sale profit due to appreciation is a taxable capital gain. the other 66% of the sale profit due to appreciation is still excluded from capital gains taxes.
If the property is on the market for sale, but not sold before the owners vacate the property, the time it sits empty pending sale is still qualfied use. Should the owners decide to take the property off the market and convert it to a rental, the time the property is used as a rental is a non-qualified period.
In the example you posed in your question, the property sits vacant until it is sold. Provided the homeowner meets the two of five year ownership and occupancy tests when the property is sold, up to $250K of capital gain per taxpayer can be excluded from capital gains taxes.