Atlanta Real Estate News & Atlanta GA Real Estate Home Sales » First Time Buyerstitle_li= Real Estate Finance » Housing and Economic Recovery Act of 2008

Housing and Economic Recovery Act of 2008

Atlanta Real Estate News | Email the Author: Brad Nix, Managing+Broker
Posted: August 3rd, 2008
Category: First Time Buyers, Real Estate Finance



UPDATE: Linda Dvorak commented at Agent Genius with some great clarifications of the nuances of the capital gains issue in this law.  Please visit http://agentgenius.com/?p=3193#comment-16288 and read comment #41 for a great explanation.  You can also visit Exeter for a detailed analysis.

capital-gains-300x199 Housing and Economic Recovery Act of 2008

The Housing and Economic Recovery Act of 2008 was recently passed and it included many positive things for buyers and sellers of real property. Many real estate bloggers have covered this topic (view blog search results), but Dan Green brought to light one of the biggest downsides to the new act.

As he found buried deep on page 690 of the 694 page law an important change to the Capital Gains Exclusion rule that could cost home sellers across the country.  Dan said…

“Under the former Capital Gains Exclusion rule, home sellers could claim $250,000 of home sale profits tax-free ($500,000 if filing jointly) provided they physically lived in the home for 2 of the previous 5 years. Savvy real estate investors exploited this tax rule by moving between residences every two years.

Even “regular” homeowners were coached to stay in their homes for at least 2 years for tax reasons.

Under the new Capital Gains Exclusion rule, however, this sort of tax-minimizing behavior is rendered impractical. The new Capital Gains Exclusion formula is not an all-or-nothing proposition. Instead, it’s a ratio.

In other words, if a home seller occupied a property as a primary residence in 2 of the last 5 year, under the new system, he would be entitled to 40% of his capital gains tax-free versus 100 percent of those gains before the new housing law passed.

The effective date for the new Capital Gains Exclusion rules is January 1, 2009 so homeowners selling in 2008 are exempt. “

Here is the formula:

capitalgainsexclusion Housing and Economic Recovery Act of 2008

Here is a sample equation:

You bought a home in January 2004 and paid $500,000.  This has been your primary residence until this year, January 2008, when you bought another property and moved your primary residence.  Say you sell your original property next year, January 2009, for $600,000.  Your capital gains formula:

1460 / 1825 = 0.80 x $100,000 = $80,000 Capital Gains Exclusion

1460(365 days x 4 years) / 1825(365 days x 1 year) = 0.80 x $100,000 ($600,000 - $500,000) = $80,000

Which means you would pay capital gains tax on $20,000.  Capital Gains Tax is currently at 15%, so you would pay $3,000 in new taxes that you would have avoided prior to this new law. *Please note this does not account for the state portion of capital gains, In Georgia that would be an additional 6% of the gains or $1,200 for a total of $4,200 in taxes on the gain.

It may sound like a small number when you profit $100,000 to only pay $4200, but what happens if the new government leaders change the Capital Gains Rate? This rate has been as high as 45.5 percent in the past.  This is not good for future sellers of real estate.

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