Congress has pulled the rug out from under vacation-home owners planning to squeeze tax-free profit from their second homes. Under current law, you could sell your primary residence and take up to $250,000 of profit ($500,000 if you file a joint return) tax-free, as long as you owned and lived in the place for two of the five years leading up to the sale.
| Row 0 - Cell 0 | Federal Rescue Provisions for Buyers and Sellers |
| Row 1 - Cell 0 | New Law Adds Tax Breaks for Real Estate |
| Row 2 - Cell 0 | Seniors Get a Gift From the New Housing Law |
Then you could move into your vacation home or a rental property and, by living in it for at least two years, get a second bite of the tax-free apple. Even profit that built up while it was a vacation home or rental could dodge the IRS.
No more. To help pay for the big housing bill passed this summer, Congress has changed the rules so that some of your gain will be taxable if you convert your vacation home or rental unit to a primary residence after 2008.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The portion of the gain to be taxed is based on the ratio of nonqualified use -- the time the property is used as a vacation home or rental unit after this year -- to the total amount of time you owned the property.
Assume you bought a second home in 2000. Let's say you convert it to your primary residence in 2011 and sell it two years later. In this example, the home would be used as a vacation property for two years after 2008, so one-seventh of the profit (two out of the 14 years you owned it) would be taxed at capital-gains rates. The remainder of the gain -- up to $500,000 for couples -- would be tax-free.
This tax-law change could be even more significant if you buy a second home after 2008. In that case, none of the time it is used for vacations or rental income qualifies for the tax exclusion. But if you convert it to your principal residence, the longer you live there, the less the profit from a sale will be taxed. And you can avoid the crackdown altogether if you move in before the end of the year, says Raffaele Mari, a CPA in Corona Del Mar, Cal.
But what do you do with your current home? You could rent it to generate cash flow and buy some time before selling it in this slow housing market, says Mari. The tightening doesn't apply in reverse: You'd still qualify for tax-free profit on the home as long as you sell it within three years to meet the two-of-five-years test.
-
Stocks Keep Climbing as Fed Meeting Nears: Stock Market TodayA stale inflation report and improving consumer sentiment did little to shift expectations for a rate cut next week.
-
Your End of Year Insurance Coverage Review ChecklistStop paying for insurance you don't need and close coverage gaps you didn't know about with this year-end insurance review.
-
Crypto Trends to Watch in 2026Cryptocurrency is still less than 20 years old, but it remains a fast-moving (and also maturing) market. Here are the crypto trends to watch for in 2026.
-
Is a New $25,000 Health Care Tax Deduction Coming in 2026?Tax Policy A proposal from GOP Sen. Josh Hawley is adding to the chatter about health care affordability.
-
An HSA Sounds Great for Taxes: Here’s Why It Might Not Be Right for YouHealth Savings Even with the promise of ‘triple tax benefits,’ a health savings account might not be the best health plan option for everyone.
-
Mortgage Refinance in 2025? These Tax Breaks Can Boost Your SavingsTax Breaks Refinancing your mortgage comes with tax implications, but also opportunities to deduct certain expenses on your return.
-
How the 2025 Child Tax Credit Rules Impact Single ParentsTax Credits New changes to family tax credits, like the Child Tax Credit, will impact the eligibility of some households.
-
Money for Your Kids? Three Ways Trump's ‘Big Beautiful Bill’ Impacts Your Child's FinancesTax Tips The Trump tax bill could help your child with future education and homebuying costs. Here’s how.
-
Key 2025 Tax Changes for Parents in Trump's MegabillTax Changes Are you a parent? The so-called ‘One Big Beautiful Bill’ (OBBB) impacts several key tax incentives that can affect your family this year and beyond.
-
Amazon Resale: Where Amazon Prime Returns Become Your Online BargainsFeature Amazon Resale products may have some imperfections, but that often leads to wildly discounted prices.
-
Ask the Editor, June 13: Questions on Home Sales and TaxesAsk the Editor In our latest Ask the Editor round-up, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on home sales and calculating tax basis in a home.
