BiggerPockets

The main focus of the bill was to help those in foreclosure and to bail out mortgage giants Freddie Mac and Fannie Mae.

They also added something to help collect more tax dollars from homeowners. Although it has nothing to do with solving the housing crisis this new change will affect owners that own second homes.

Currently, when a homeowner sells their primary residence they can escape taxation on the first $500,000 of their profit (married joint-filers) or $250,000 (single filers) if they lived in their primary residence for 2 out 5 years.

Under the old law, a homeowner could also claim the exclusion even on an investment property or vacation home if they turned it into their primary residence and lived there 2 out of 5 years.

Property owners in markets with high appreciation rates could sell their principal residences for a hefty profit pocketing the first $250,000 or $500,000 tax-free and then move into their investment property or vacation home for a couple of years and repeat the process.

As of January 1^st, 2009 that is no longer possible. The new law will distinguish between “nonqualified” periods of rental or investment use and “qualified” periods of principal residence use.

Here’s an example: If you bought the house in 2009 and owned it for 10 years but lived in it as your primary residence for just two years, only two-tenths of the gain would be tax-free. They would take the total gain in property value and in this case divide it by 10 (ten years). You would then be taxed on the 8 year portion it was a rental, and not be taxed for the two year portion that you lived in it. Under this new law, that is now 8 years of tax you would not have had to pay under the old law.

If you are planning to sell your primary residence and collect the tax-free gains, and move into another property you own, then you may want to think about doing it before January 1^st 2009 when the new law takes affect.

William Barnard - Managing Partner, Nationwide Property Investments, LLC