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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Show All Comments
Rainer
200,847
Mana Tulberg
805 County Real Estate - Camarillo, CA
Real Estate Agent - Camarillo CA
Joanne, When the government gets their hand all over an issue someone is going to have to pay. We just have to see who they choose this time.
Oct 13, 2007 11:46 PM #11
Rainer
83,563
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
So true Mana! 
Oct 13, 2007 11:51 PM #12
Rainmaker
246,143
Gena Riede
Riede Real Estate, Lic. 01310792 - Sacramento, CA
Real Estate Broker - Sacramento CA Real Estate (916) 417-2699
Joanne, glad to see some relief may be insight for these people and sorry to see the 2nd home and vacation home owners picking up the slack. I guess we can't have our cake and eat it, too. Although, if we could, my selection would be chocolate!
Oct 14, 2007 10:35 AM #13
Rainer
83,563
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
Hi Gena, I go for chocolate myself!  I must say that the majority of second home owners aren't even aware of that loophole, but there were several people who were planning with that goal in mind. 
Oct 14, 2007 11:09 AM #14
Rainmaker
246,143
Gena Riede
Riede Real Estate, Lic. 01310792 - Sacramento, CA
Real Estate Broker - Sacramento CA Real Estate (916) 417-2699
Joanne, maybe given enough time...that too shall change once again.
Oct 14, 2007 11:52 AM #15
Rainer
83,563
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
One thing we can count on is change Gena!
Oct 14, 2007 11:55 AM #16
Ambassador
405,210
Jo-Anne Smith, Sales Representative
Oakville, ON
Oakville, Burlington and Mississauga Region Real E

Joanne,  The government there sounds very similar to here....squeezing every last drop out of it's citizens.

Good info for homeowners....you really stay on top of this stuff !

Jo 

Oct 14, 2007 07:27 PM #17
Rainer
83,563
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
But Jo, it is so they can take care of you, isn't it?   ;)
Oct 14, 2007 07:50 PM #18
Rainer
52,384
Jennifer Steck
Rocky Mountain Homescapes, Keller Williams, Denver Colorado - Denver, CO
Denver Real Estate
Joanne- This is great information for lots of folks. It will be interesting to see how this continues to develop with the politicians believing that buyers are ignorant and need to be taken care of and them determining to increase taxes at the same time. It seems as though when they help someone, they have to hurt someone else. It must be one of those unwritten rules.
Oct 15, 2007 07:07 AM #19
Rainer
83,563
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
Hi Jennifer, when they lose one source of revenue, they have to find a replacement for it.  Those with deeper pockets look like good candidates!
Oct 15, 2007 08:56 AM #20
Rainmaker
223,559
Laurie Mindnich
Centennial, CO
Jo, as someone who is also in an area that has a large number of vacation properties, I'd be very interested, as well, to get more details. 
Oct 15, 2007 09:18 AM #21
Rainer
83,563
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
Hi Laurie, I will be updating everyone once is becomes law.  Our little niche is one that gets surprisingly little press and sometimes you have to hunt for it!
Oct 15, 2007 09:27 AM #22
Rainer
71,677
Rita Taylor
None - Sanford, NC
Sanford NC Real Estate - Homes for Sale in Sanford North Carolina

Joanne,

I wonder what the new wording will be?  Sometimes these tax law changes have consequences that are not intended by congress.  I know AMT was never intended to hit the middle class but it is coming closer every year. 

Oct 17, 2007 06:17 PM #23
Rainer
83,563
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
Your guess is as good as mine Rita, but I bet it won't help second home owners!
Oct 17, 2007 08:13 PM #24
Rainmaker
325,145
Esko Kiuru
Bethesda, MD

Joanne,

Without knowing all the details, it still looks like the vacation home owners are going to lose on this one. Yet, it shouldn't have a large impact on that market segment since it doesn't appear to be a sweeping change.

Oct 19, 2007 11:06 PM #25
Rainer
83,563
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
Hi Esko, it will be a small number affected, but still...he with the deeper pockets is a target. 
Oct 20, 2007 12:00 AM #26
Rainmaker
226,587
Joan Snodgrass
Midamerica Referral Network - Kimberling City, MO
    Thanks for the heads-up on this Joanne.  It will affect all of us and our clients in the 2nd home market.
Oct 20, 2007 12:01 PM #27
Rainer
83,563
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
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.
Oct 20, 2007 04:13 PM #28
Rainer
17,751
Jason Adams
Coldwell Banker Colorado Rockies Real Estate - Dillon, CO
Realtor - Summit County, Colorado
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?
Oct 24, 2007 05:41 PM #29
Rainer
83,563
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
Jason, you might get a lot of people going with that comment! 
Oct 24, 2007 05:55 PM #30
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Rainer
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Joanne Hanson

Summit County, Colorado Realtor
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