Moving Into Investment Property as Your Primary Residence? Think Again!

Part of the housing stimulus packaged signed into law last week will significantly reduce the gains you can claim from your primary residence (for the years you did not live there).

According to the Wall Street Journal article, August 6, 2008, "House-Hoppers May Suffer Under New Tax Rules",

"Here's an example: Suppose a married couple buys a home on Jan. 1 next year for $600,000, says Mr. Olivieri of White & Case. They plan to hold it as an investment. On Jan. 1, 2012 -- three years later -- they begin using it as their principal residence. They live there two years and sell it on Jan. 1, 2014 for $1.1 million, for a profit of $500,000.

Under the old law, they would have been able to exclude the entire $500,000 gain from their taxable income, Mr. Olivieri says. But under the new law, they could exclude only two-fifths of the gain, or $200,000, since the other three-fifths would be considered attributable to the three years the home wasn't their principal residence, he says."

I have heard of this strategy among some circles in San Francisco. The idea is that if you own multiple properties, you should live in them for two years and turn them into your primary residence, so that when you sell the property, you can claim the first $250k in gain (or $500k if you are married), tax-free.

This strategy will be severely impacted going forward.

Here is the link to the article - Subscription Required...

http://online.wsj.com/article/SB121798585043615583.html