Jersey Shore Second-home Sellers Pay For Tax Credits
You have probably heard, last week President signed into law the Housing Rescue and Foreclosure Prevention Act. This is the most comprehensive housing bill to be enacted in over a decade. The bill is designed to help more buyers of Jersey Shore real estate realize their dreams, as well as, boast the struggling housing and mortgage markets.
One of the biggest benefits, and probably one of the most talked about provisions in this legislation, is the $7,500 tax credit to first time home buyers. Tax breaks are all well and good, but they have to be paid for somehow. While first time home buyers are getting a break, second home sellers will be paying for the $15.1 million dollars in tax cuts.
Up until the new legislation went into effect last week, homeowners could exclude up to $250,000 taxable profit on the sale of their home if they’re single taxpayers and $500,000 if married filing joint returns. The catch being, they had to live the in house as their primary residence for two of the five years before it is sold.
Many Jersey Shore second home owners took advantage of this by moving into a property that was once a rental or vacation home, live there for two years prior to selling and benefiting from the tax-free profit.
With the new legislation, owners selling on or after January 1, 2009 will have to factor out the period when the property was still a rental or vacation home and pay taxes on that portion of the profit.
Here’s an example courtesy of BankRate.com:
Jim and Joan are in their 50s and next January buy a vacation home for $200,000. Ten years later, they retire, sell their old principal residence and make the vacation home their new principal residence. Fifteen years after that, Jim and Joan, now in their 80s, move to an assisted-living community and sell the vacation-turned-primary-residence for $700,000. That nets them a gain of $500,000.
Under pre-housing bill statute, Jim and Joan wouldn’t face any tax on the entire $500,000 gain.
The new law, however, means that Jim and Joan can exclude only 15/25, or 60 percent, of the gain. That would give them $300,000 of nontaxable property sale profit and $200,000 upon which they would owe long-term gain taxes.
As you can see, the new legislation significantly affects second home owners and their retirement strategies. The second home market has remained strong in the last few years, but this may change dramatically in the near future….something congress may not have intended.
If you own Jersey Shore real estate and are in the middle of converting your second home to your main residence, you could be out of luck. If you don’t have enough time left in 2008 to meet the two year lived-in rule and sell the property, when you do sell next year, you will pay.
If you need to sell your Jersey Shore home before January 1, 2009, give us a call at 866-222-0158 #550. We will help you get the highest price for your Jersey Shore real estate before the end of the year!