Change to Code §121

[Roland Slugg]

§3092 of the new "Housing and Economic Recovery Act of 2008" (H.R.3221) amends IRC §121 by requiring that gain on the sale of a taxpayer's principal residence be allocated between the periods of "qualified" and "non-qualified" use. "Qualified use" is the time the home was used as the T/P's principal residence, and "non-qualified" use is the time the home was used as rental property, a second or vacation home, or as unoccupied investment property. The portion of the gain allocated to "non-qualified" use will not be subject to the $250k/$500k exclusion.

This change applies to sales occurring after 2008. It was not clear to this writer if "non-qualified" use is retroactive to periods prior to 2009, but my impression upon reading the new law was that it is not. (Readers may try to interpret this provision for themselves by clicking here: http://thomas.loc.gov/cgi-bin/query/...:H.R.3221.ENR: §3092 of the Bill is almost at the end.)

This will end what has been an excellent tax opportunity for those who own rental or vacation property. Occupying such a property as one's principal residence for two years then selling it tax free (subject only to the $250k/$500k maximums and to taxation on the accumulated depreciation) will no longer be an option. How quickly that opportunity disappears depends to some extent on the question referred to above regarding retroactivity. I would anticipate this uncertainty will soon be clarified by those more qualified than I to read and interpret the new law's confusing language.

Congress giveth ... and Congress taketh away.

[Snaggletooth]

Current Period Grandfathered

Roland, just reading from §3092 (a) (4) (C) (i)

it appears that there can be no time pertaining to non-qualified use before Jan 1 2009.
Thus someone who sells by December 31, 2008 is allowed pre-passage treatment. Interesting that §3092 appears in a section called "Revenue Offsets" whereby the rest of the taxpayers get to cough up tax money to pay for those who will be receiving the benefits of this new bill.

The new non-qualifying period can change one's entire homeselling strategy. For example, anyone who buys a new home and moves into it prior to selling their old home is now at risk of incurring additional tax liability.

[les grans]

I think Snag's concern at the end of his last post (about folks who move into a new home before they've sold their prior one) should be less of a concern, based on [new] IRC Section 121(b)(4)(C)(ii)(I):

(ii) EXCEPTIONS- The term `period of nonqualified use' does *not* include--
(I) any portion of the 5-year period described in subsection (a) which is *after* the last date that such property is used as the principal residence of the taxpayer or the taxpayer's spouse..." [emphasis added]

What this does, I think, is cause the seller who's gonna move - or, more accurately, I guess, who does move, - *back into* a prior principal residence a problem because the seller's time out of the earlier home will become "nonqualified" after the seller moves back in. The exception protects only the last period of being out of the prior home, if there's more than one.....