Tax Law Change for Second Properties

If you own a vacation home/second home, read this!

Congress has presented us taxpayers a Christmas tax present effective January 1, 2009. This will have acute tax consequences if you own a vacation/second home and intend to occupy that home as your principal residence in the future.

Current tax code: you can sell a principal residence every two years without any tax consequences on capital gains if you occupy that residence for 24 of the past 60 months. The capital gains exclusion is $250,000 for a single person and $500,000 for a couple. You could then sell that vacation home after 24 months occupancy as your principal residence and use the $250,000/$500,000 capital gains exclusion. Any amount above the exclusion rate is taxed as a long-term capital gain at the 15% rate.

New tax code: you can still sell a principal residence with the current capital gains exclusion but you will only be able to exclude a pro-rata portion of your vacation/second home's capital gains based on the percentage of time you occupied that home as your principal residence.

Call me if you have questions and I can provide more specifics but eventually you'll need to consult your accountant (and hope he/she is aware of the tax code change).