The $250,000/$500,000 Capital Gains Exclusion, Excluded?

Monday I discussed some of the highlights of the Housing and Economic Recovery Act of 2008 (HR-3221). Hidden among the many pages of the bill, are some interesting changes to the Capital Gains Exclusion Rule.

Based on the new Capital Gains Exclusion Rule, the profits from the sale of your home (capital gains) may have to be shared with your favorite Uncle. Yes Uncle Sam has decided he wants his portion as well. Currently, homeowners enjoy tax free profits from the sale of their primary residence up to $250,000 (if filing single) or $500,000 (if filing jointly). As of January 1, 2009 this simple math will now will be replaced with the ratio mentioned in my last post:

What exactly does this mean to the San Mateo County homeowner? If you have owned your home for more than two years and have declared this home as your primary residence every year, you will still receive your full Capital Gains Exclusion ($250,000 if filing single, $500,000 if filing jointly) when you sell. But, if you are one of those savvy investor types that lived in a home two years for tax purposes and then converted it into a rental, you may have a problem.

Suppose you declared this property as your primary residence for two of the last five years. Under the current Capital Gains law, you would receive 100% of profits up to the exclusion tax free. Under the new law, you would only receive 40% of the exclusion tax free.

How will this affect the San Mateo County Housing Market and your home’s value? Will we see an increase in homes for sale as investors unload their inventory in the last half of this year? Will we be forced deeper into a buyer’s market? Only time will tell as we only have about four months to reap the benefits of the 2008 Exclusions.

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