President Bush Signs Housing Act of 2008 with Changes to Tax Free Exclusion on Sale of Home

President Bush signed the Housing and Economic Recovery Act of 2008 yesterday, which contained some surprises.

Reduced Tax Free Exclusions on Sale of Home

The Housing Act included provisions that may reduce the amount of the tax free exclusion available to a taxpayer upon the sale of their primary residence if they had also used the home as a vacation home, second home, rental property, investment property or in their trade or business. These uses are referrred to as "non-qualified use."

Section 121 (121 Exclusion)

The current exclusion falls under Section 121 of the Internal Revenue Code. A taxpayer can exclude up to $250,000 in capital gains (per taxpayer; $500,000 for married couple filing jointly) from their taxable income if they have lived in their home as their primary residence for at least a total of 24 months out of the last 60 months.

Changes under the Housing Act of 2008

The Housing Act of 2008 will now prohibit a taxpayer from excluding part of the capital gain based on the number of years (percentage of total use) that the property was used for non-qualified use such as personal vacation usage or if it was held as rental property. These changes are summarized here.