DISCLAIMER!

DO NOT rely solely on the information below as each person's actual situation and circumstances will vary! The below explanation, and example, is meant only as an overview to the law and is not intended to represent an actual situation or person. I STRONGLY urge you to talk to your tax accountant for a full explanation of how the new CAPITAL GAINS EXCLUSION law will affect your taxes.

Overview of Changes To The Capital Gains Exclusion Law

Under the old capital gains exclusion law, a homeowner could live in his/her home for 2 of the last 5 years, rent it out the remainder of the time, then sell it and he/she would be entitled to the full $250,000 of capital gains exclusion. i.e. not have to pay capital gains taxes on the first $250,000 of profit from the sale.

Come January 1, 2009, however, that loophole will be closed. Under the new law, the amount of capital gains exclusion a homeowner will be eligible for will depend on the ratio of the (Number of days the home was a "primary" residence) divided by (Number of days the home was owned) - however, still within the original restriction of having lived in it for 2 of the last 5 year.

The formula looks like this:

Capital Gains Exclusion (CGE) =

(Profit from the sale of the home) X (# days home was primary)/(# days home was owned)

For example: You purchased a home 5 years ago for $200,000. You lived in it for the first 2 years but moved out and rented it for the next 3 years. You've just sold it for $250,000 which means you had $50,000 in capital gains. Under the old law you would not be taxed on the $50,000 profit. Under the new law, however, your capital gains exclusion (CGE) would be:

CGE = $50,000 * (730 days)/(1,825 days)

CGE = $50,000 * .40 (or 40%)

CGE = $20,000 (exempt from capital gains tax)

In other words, the homeowner would be responsible for paying capital gains tax on the remaining $30,000 of the $50,000 profit from the sale.