Second home owners could be affected negatively by the new Debt Relief Act

By
Real Estate Agent with Coldwell Banker Colorado Rockies Real Estate

On Friday the House passed the Mortgage Forgiveness Debt Relief Act by an overwhelming majority.  The goal of the bill is to help people who sell their homes in a short sale.  A short sale occurs when the house is sold for less than what is owed on the mortgage and the balance due is forgiven by the lender.  In the past, the amount forgiven was considered income and income taxes would be due on it.  If the bill passes the Senate and is signed into law by the President, it will help many people who are struggling with financial problems so that they at least do not get taxed on what they don't have. 
ImageChef.com - Custom comment codes for MySpace, Hi5, Friendster and more Someone has to come up with the money that will no longer be generated by these taxes, and it could very well be vacation and second home owners.  According to the Square Feet blog,

<Uncle Sam wants to clamp down on a loophole that enables wealthier taxpayers to shelter gains from rental properties and vacation homes by briefly treating each of them as "principal'' residences.>

 A few years ago, the loophole was big enough to drive a bus through, but it was narrowed down when the law was changed to say that if you moved into your vacation home or investment property and turned it into a primary residence, you had to live there at least two of the last five years before you could pocket up to $250,000 per person gain when you sold it.

Today it looks as if that loophole will be narrowed further still, although the details of the restrictions are still not clear.  Many people have done several Section 1031 Tax Deferred Exchanges, rolling the gain from each sale into a larger property with plans to eventually turn the last one into a permanent residence on retirement.  That strategy may no longer work!  At least, not without paying more in taxes when you sell it.  Stay tuned and I will update you as I learn more details as this bill goes through the senate. 

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Location:
Colorado Summit County
Tags:
1031 exchange
vacation home

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Rainer
83,553
Joanne Hanson
Summit County, Colorado Realtor
Coldwell Banker Colorado Rockies Real Estate
Hi Esko, it will be a small number affected, but still...he with the deeper pockets is a target. 
October 20, 2007 12:00 AM
Rainmaker
226,587
Joan Snodgrass
Midamerica Referral Network
    Thanks for the heads-up on this Joanne.  It will affect all of us and our clients in the 2nd home market.
October 20, 2007 12:01 PM
Rainer
83,553
Joanne Hanson
Summit County, Colorado Realtor
Coldwell Banker Colorado Rockies Real Estate
Joan, perhaps you more than some, as I am guessing that you might have a larger share of people that would buy a home doing a 1031 with plans to retire there in a couple of years.  Of course, it doesn't affect them until they sell that home, but sooner or later you pay the piper.
October 20, 2007 04:13 PM
Rainer
17,751
Jason Adams
Realtor - Summit County, Colorado
Coldwell Banker Colorado Rockies Real Estate
Let me see if I get this right, the government makes laws to help people that have made bad decisions by punishing people that have made good decisions. It sounds like a win win for the government, they keep a lot of people off welfare and at the same time they keep the middle-class from getting further ahead. It is supposed to be for the people by the people. Who's doing the voting?
October 24, 2007 05:41 PM
Rainer
83,553
Joanne Hanson
Summit County, Colorado Realtor
Coldwell Banker Colorado Rockies Real Estate
Jason, you might get a lot of people going with that comment! 
October 24, 2007 05:55 PM
Anonymous
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Rainer
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Joanne Hanson

Summit County, Colorado Realtor
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Additional Information

The Colorado mountains, real estate, ski resorts, lifestyle and vacation homes is my focus. We talk about buying and selling ski condos in Breckenridge, Keystone and Copper Mountain. Homes and land in Frisco, Dillon and Silverthorne are also in our market area
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