Capital Gains Exclusion is a Changin'!

Mortgage and Lending with The Tyler Osby Team at Fairway Independent Mortgage

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Going Under The Radar

So, you remember that rule that capital gains exclusion rule that has become pretty much common knowledge?

Go ahead and get ready to change it.

The rule where if you sell a home after living in it for two years you could carry $250,000 (single person) or $500,000 (jointly filing) without getting hammered on capital gains.  Well, throw that out the window.  This new piece of legislation (694 pages) changes that tax code.

Sneaking It Under The Radar

The Housing and Economic Recovery Act of 2008 had a lot of great (highly publicized) components:

  • Increased funding for Fannie Mae and Freddie Mac.
  • Expanded loan limits in high cost areas.
  • Tax credit of $7,500 for first time home buyers (Haven’t owned a home in 3 years) - more on this later.

In a huge piece of legislation like this, it’s easy for things to roll under our radar.

This piece of legislation has a great example.

New Rules

So, the new rules are targeted at the savvy investors who  were buying a property, living in it for two years, then moving on to the next property and keeping the old one as a rental.

Here’s the new formula (courtesy of Dan Green @ The Mortgage Reports & US Government):

New Capital Gains Exclusion Formula

As Dan Green put it, the new rule takes into consideration the actual usage as a primary residence over it’s qualified life.

An Example of Before Vs. After

Say you bought a home for $200,000 5 years ago.  You moved out of it three years ago so you could buy your new home.  You’re now selling the home you bought 5 years ago for $225,000.

Your Profit is $25,000.


  • You have no capital gains tax liability on this profit.  It didn’t matter if you moved away from that property after two years and turned it into an investment property.


  • Since you lived in the home 40% of the time, you’ll be responsible for capital gains on $15,000 of that profit.  Big change huh?


That’s $0 considered capital gain vs. $15,000.   Big change.  This could cost a lot of investors some serious cash.

Now What?

Well, this new rule doesn’t mean that it’s no longer a great idea to buy a home and move every two years.  What it does mean is that if you are planning on buying a home every two years, that when you sell it - you’re tax liability just increased big time.

When Does This Kick In?

If there is any good news in this post, it is that you’ll have until January 1st, 2009 until this comes into play.  I can only suggest that if you’re falling into the large category of Americans that this effects, that you take action and implement a strategy that works for you.  Is it the right time to sell?  Only a real estate professional and tax professional can help you determine if now is the right time.

Wouldn’t you rather say you had the conversation and made a strategic decision instead of saying you had no idea?

Need Help?

If you need to connect with a professional for advice, I’d be happy to help!

Some of the advantages of being an active blogger is that I’ve accumulated connections not only in Iowa, but across the entire country!

Let me know what my team can do for you.

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