Financial Planning, Retirement, Vacation homes

Popular Conversion Tax Holiday has Ended

It used to be a tax loophole, now the loophole is closing. sometimes called a conversion, I am referring to the ability to avoid capital gains tax on an appreciated investment home or vacation property by converting it to a personal residence. Up until Congress started looking for sources of tax revenue to pay for last summer’s housing bill, you could buy an investment property, or 1031 exchange into one, have it increase in value, then move in to it. After living in it for 2 years, you could sell it as your residence, and use the regular exclusions of $250,000 of gain for a single person. or $500,000 of gain for a married couple, thus eliminating the capitol gains tax on the combined gain of all the propertes! But…now the party’s over.

From now on, you will owe capital gains tax on the total gain times the ratio of time it was an investment property or second home divided by total years of ownership. This tax on the period of time you occupied the home falls under the $250,000 and $500,000 exclusions. Here’s a Kipplinger article on the subject.