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The Taxpayer Relief Act of 1997 is also called the Tax Preparers’ Full Employment Act or the Second Home Subsidy Act. This is because this rule provides a home owner with extra money to buy a second home or vacation home for both profit and fun. Before this rule, about 5 to 10% of home sales were second home sales; with the implementation of this rule, 40% of all home sales by 2005 were second homes.
Most of these second homes were bought for investment purposes while the others, as getaways or vacation homes. Then there were also investment and vacation homes that later became retirement homes and vacation homes that worked as vacation rentals when the owner was living in their primary residence.
This relief act proved to be the most lucrative tax break for the second home. With the passing of the H.R. 2014 by the 105th U.S. Congress, its key rule stated that on selling your home, and if you qualify, you can keep capital gains of up to $500,000, tax free if married and filing jointly or $250,000 for married taxpayers filing separately and single taxpayers.
However your home has to have been your primary residence for at least two of the last five years to qualify for this exclusion. This does not mean that you have to physically occupy your home for 730 days. Going on business trips or world cruises for a few months, in short periods, does not prevent you from meeting this requirement.
However if you have completed this requirement, and have to leave it vacant for long periods of time you have to sell it in the five year period or move in again after five years to reestablish this two year requirement. However if you treat your second home like your primary residence every alternate year, you will need four years to qualify for either or both homes.
With the second home subsidy act, you can take the exclusion on each home every two years if you qualify with its requirements and as often as you meet the qualifications. However without this capital gains tax relief, you end up paying a 5 to 15 % federal capital gains tax, depending on your gross income.
The Second Home Subsidy Act has also removed the $125,000 tax exclusion on capital gains for home owners above 55, and the ‘rollover’ law where you defer from paying taxes if you buy a more expensive home. There is a related law that makes provisions if you have to sell your home for unexpected reasons like job change or illness, before meeting the two year residency requirement.
According to the Second Home Subsidy act, you can also prorate the $500,000/$250,000 exclusion if you have to sell your home early. So if you can only live for a year before having to sell your home, you are excluded from a maximum of $250,000 in capital gains if you are married and are filing jointly, and $125,000 if you are filing separately.
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