On Friday the House passed the Mortgage Forgiveness Debt Relief Act by an overwhelming majority. The goal of the bill is to help people who sell their homes in a short sale. A short sale occurs when the house is sold for less than what is owed on the mortgage and the balance due is forgiven by the lender. In the past, the amount forgiven was considered income and income taxes would be due on it. If the bill passes the Senate and is signed into law by the President, it will help many people who are struggling with financial problems so that they at least do not get taxed on what they don't have.
Someone has to come up with the money that will no longer be generated by these taxes, and it could very well be vacation and second home owners. According to the Square Feet blog,
<Uncle Sam wants to clamp down on a loophole that enables wealthier taxpayers to shelter gains from rental properties and vacation homes by briefly treating each of them as "principal'' residences.>
A few years ago, the loophole was big enough to drive a bus through, but it was narrowed down when the law was changed to say that if you moved into your vacation home or investment property and turned it into a primary residence, you had to live there at least two of the last five years before you could pocket up to $250,000 per person gain when you sold it.
Today it looks as if that loophole will be narrowed further still, although the details of the restrictions are still not clear. Many people have done several Section 1031 Tax Deferred Exchanges, rolling the gain from each sale into a larger property with plans to eventually turn the last one into a permanent residence on retirement. That strategy may no longer work! At least, not without paying more in taxes when you sell it. Stay tuned and I will update you as I learn more details as this bill goes through the senate.