Principal Residence Gain Exclusion - it's not what it used to be

Somebody had to fund the benefits of the Housing and Economic Recovery Act of 2008 (P.L. 110-289) , and that may very well be you. In order to offset an estimated $2 billion of the cost of the legislated federal relief and stimulus, one of our favorite real estate tax avoidance strategies was dealt a serious blow.

Prior to amendment, Internal Revenue Code Section 121 generally allowed a taxpayer to exclude from taxation the gain from the sale of a principal residence if it was so used by the taxpayer for at least two of the five years preceding the date of the sale. Gain was fully excludable up to $250,000 in the case of a single taxpayer and up to $500,000 in the case of a married couple. This allowed us to avoid recognition of gain on the sale of business or investment property simply by living in it for at least two years before the sale. This was an easy and safe tax avoidance strategy for people who wanted to dispose of rental property or a vacation home without having to reinvest the proceeds in like real estate.

Effective Jan. 1, 2009, gain realized from the sale of a principal residence must be allocated between periods of qualified use and nonqualified use in determining how much of it may be excluded from recognition. Nonqualified use is defined as use other than as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse, and will result in at least partial taxation of gain.

Example: A taxpayer owns two properties. One is his principal residence in Boulder which he purchased in 1992. The other is a Vail vacation condo purchased Jan. 2, 2009 for $400,000. His plan had been to sell the Boulder house this fall, pocket the cash, and then move into the Vail condo on Sept. 2, 2009, when it will be worth no more than what he paid for it. The former investment property was to be converted to his next principal residence eligible for full gain exclusion merely by his living in it for the next two years. He was then going to sell it on Sept. 2, 2011, for $650,000 (happy days are here again), and pocket the entire $250,000 gain tax-free. Although that would have worked in the past, under the amended law, the taxpayer is going to have to write a check to Uncle Sam.

Let’s look at the math: The period of ownership from January 2009 through September 2011 is 32 months. The period of nonqualified use of the Vail condo before it was converted to the principal residence was eight months, or 25 percent of the time the taxpayer owned the condo. That means that $62,500 - or 25 percent - of the $250,000 gain is now taxable.

It does not matter if there was no appreciation during the period of nonqualified use. It does not matter if the property was purchased with the genuine intention of making it the principal residence as soon as possible. Gain will be taxed if there was any nonqualified use after 2008.

Although the portion of the gain from the sale of property converted from investment or business use will be reduced the longer the taxpayer occupies it as his principal residence, it will never be entirely eliminated. At least for now, this loophole has been substantially narrowed, and we will need to look to other strategies to shelter, defer and exclude gain from the disposition of real estate.

Rock Creek - Home & Community

Find a Home and a Community in Rock Creek
Are you looking for a home in Boulder County but having trouble finding one that meets all of your needs? Rock Creek, the master-planned community located in Superior and adjacent to Flatiron Crossing Mall, may be the diamond in this rough market for which you have been looking. This community has a wide variety of options for single-family homes ranging in price from $299,000 to $1.2 million. Other options, such as condos and townhomes, also exist; this wonderfully designed community has something for everyone. With the location, amenities, and recent market slowdown, this is the perfect time to explore all of the potential deals within Rock Creek. RE/MAX of Boulder is very familiar with this subdivision and your agent would be happy to help you explore the opportunities available you within it.

Rock Creek’s location and amenities make it one of the most desirable places to live in Boulder County. The neighborhood is situated just minutes east of Boulder off of U.S. 36 and is within half of an hour of downtown Denver, as well. One of the benefits of the Boulder County address is access to Boulder Valley School District schools. With two excellent schools in the community, Superior Elementary and Eldorado K-8, it is an ideal place to raise a family. Residents of Rock Creek report feeling a strong sense of community because of the homes’ proximity to the schools and a variety of other activities, such as concerts, parades and pool parties sponsored by the active HOA within Rock Creek. Amenities include two pools, an extensive trail system, pocket parks, and a community park with baseball fields and a newly completed turf field. Flatiron Crossing Mall, dining, shopping, and movie theatres are all within walking distance of Rock Creek. With the great location and array of amenities, it is easy to see why people who buy in Rock Creek typically stay in Rock Creek.

What does this mean for you? Whether you are a buyer or an investor, you can find potential deals within Rock Creek. This subdivision provides access to the benefits of luxury living with a Boulder County address at a discounted price. Although a fair amount of inventory is on the market, the demand for homes in Rock Creek is strong, with the most activity directed toward homes priced at less than $350,000. Although sales are slower for homes in the $500,000-plus range, homes that are priced well and on nice lots are still selling. With a good rental market, increasing rental rates, decreasing availability of single-family homes at reasonable prices in Boulder, and the sense of community as well as access to amenities in Rock Creek, it is the time for you to explore the many options available in this subdivision. Contact your RE/MAX of Boulder Realtor today.

RE/MAX of Boulder, Inc. offers some advice to buyers and sellers: Although this is a buyer’s market, sellers don’t have to give their homes away. Houses that are priced well are still selling between 60 and 90 days in most instances. People who have lived in Rock Creek have had the opportunity to experience how great living in this community really is. A demand for housing in great communities with a plenty of amenities and excellent schools will always exist. Rock Creek is that community and plenty of buyers are actively looking now.

By RE/MAX of Boulder, Inc.