House Passes Change to Second Home / Primary Home Tax Treatment

HR 3648, the  Mortgage Forgiveness Debt Relief Act of 2007, has one of those "Mom and Apple Pie" bill titles that Congress is so fond of. Basically, the intent of the bill is a good one. Under current tax law, if a homeowner who faces foreclosure has some of the debt relieved by a lender, the amount of that debt relief is treated as income (whether its part of a foreclosure or a loan modification.). The Mortgage Foreclosure Debt Relief Act would eliminate the treatment of that debt relief as income.

But the loss of that tax revenue has to be made up somewhere, right? So embedded in the bill (which passed the House 386 to 27) is a provision that would modify the capital gains tax forgiveness on primary homes. Currently, a married couple can exclude up to $500,000 in capital gains on a house if it has been their primary residence for 2 or the past 5 years. HR 3648 would tie the size of the exemption to the number of years a home is  used as a primary residence. The change is forecast to raise $2B in taxes. Declaring that one of your homes has been a primary residence for 2 or the last 5 years is a popular tactic among many owners of more than one home to avoid capital gains taxes on a sale.

The bill still has to be passed by the Senate, and there will likely be some jockeying between the House and Senate over general terms. I expect, though, that the change affecting tax treatment for primary homes will stay in the bill. After all, there probably isn't a whole lot of sympathy for people who own multiple homes when others are struggling to hold on to one home.

For multiple-home owners who currently have a house on the market, or are currently in the sales process and anticipated declaring the sold property as a primary home, this is very important to watch. The provision change will apply to all sales after Dec. 31, 2007. Sellers need to discuss this with their tax advisor.