Housing and Economic Recovery Act of 2008
Two issues immediately jumped out at me in this legislation.
- Homeowners now have an above the line deduction for property taxes (maximum $500 single, $1000 joint). This is great for retirees who don’t itemize.
- Starting in 2009, a rental unit that is converted to a personal residence will have its percentage of time as a rental unit (after 2009) reduce the amount of capital gains that qualify for the $250/$500K exclusion by that percentage.
Assume that an individual buys a property on January 1, 2009, for $400,000, and uses it as rental property for two years claiming $20,000 of depreciation deductions. On January 1, 2011, the taxpayer converts the property to his principal residence. On January 1, 2013, the taxpayer moves out, and the taxpayer sells the property for $700,000 on January 1, 2014. As under present law, $20,000 gain attributable to the depreciation deductions is included in income. Of the remaining $300,000 gain, 40% of the gain (2 years divided by 5 years, notice years after you move out are not counted as nonqualified use), or $120,000, is allocated to nonqualified use and is not eligible for the exclusion. Since the remaining gain of $180,000 is less than the maximum gain of $250,000 that may be excluded, gain of $180,000 is excluded from gross income.
It is not clear yet how this will affect snowbirds.
See sections 3012 and 3092