Update on Sale of Second Homes: Potential Changes to Section 121

The mortgage relief bill that Congress is working on now will also include a provision that will tighten up the rules under which you can apply the Section 121 tax-free exclusion to the sale of your second home.

Essentially, the way it is written in its present form (which can always change until it is passed), the tax code would be changed to tax a portion of the gain received from the sale of your second home based on the percentage or amount of time that the second home was used as a second home compared to a primary residence between 12/31/2007 and the time that it is sold.

You may want to consider making some changes to your primary residence before 12/31/2007 depending on which properties have the greatest capital gain in them.