Second Home Taxes and Exclusions–Capital Gains Tax May Hurt in New York

It appears that the Federal Government is getting a little more needy, because it is now going to collect more capital gains taxes on the sales of residential real estate property in New York.

As discussed in other posts, under the “The Housing Assistance Tax Act of 2008,” homeowners no longer are simply allowed to exclude $250,000 of capital gains ($500K if filing jointly). Indeed, the calculation becomes more difficult because the gain will now be taxed on the percentage of time you used the home as your “primary residence.”

Yes, now for the “jargon.” Capital gains must now be divided between “qualifying” and “non-qualifying” uses, and potentially cutting the amount of capital gain which might previously have been “excluded” from your income tax.

To earn the “exclusion” you must own and live in the property as your primary residence for at least two years out of the five years ending on the date of sale. If the real estate was not used as a “primary residence” during the entire five-years prior to the sale, (used as a rental house or a vacation home) then you would have to reduce the amount of the capital gains tax exclusion by allocating the gain to the percentages.

A “qualifying Use” means the property must be used as a primary residence, whereas, a non-qualifying use (taxable) means the property is not being used as a “primary residence” by either the homeowner or the home owner’s spouse.

Example
The gain from the sale needs to be allocated between what gain is excluded as “qualifying” and what gain is not excluded (because it is “non-qualifying”). Divide the period of non-qualifying use by the period of ownership. Period of non-qualifying use/Period of ownership= a percentage.

Contact your trusty tax advisor on this because I do not offer tax advice. Taxpayers owning second homes, vacation homes, and rental properties will need to revise their capital gains strategy to account the implementation of the rules (January 1, 2009).

Bottom line– Be careful, understand the rules and ask you accountant or tax professional when buying a second home in Dutchess, Rockland, Westchester, Putnam or Ulster County.