From the Patrick Parker Realty Tax Season Blog Series:
Tax Implications: Converting A Second Home Into A Primary Residence
Although the rule that allows homeowners to take up to $500,000 of profit tax-free applies only to the sale of your principal residence, it has been possible to extend the break to a second home by converting it to your principal residence before you sell. Once you live in that home for two years, you have been able to exclude up to $500,000 of profit again. That way, savvy taxpayers can claim the exclusion on multiple homes.
Note: Congress has clamped down on this break for taxpayers who convert a second home into a principal residence after 2008. A portion of the gain on a subsequent sale of the home will be ineligible for the home-sale exclusion, even if the seller meets the two-year ownership-and-use tests.
The portion of the profit subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit, to the total amount of time you owned it. So if you have owned a vacation home for 18 years and make it your main residence in 2013 for two years before selling it, only 10 percent of the gain (two years of nonqualified second home use divided by 20 years of total ownership) is taxed. The rest would qualify for the exclusion of up to $500,000.
Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.
The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.
Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.
For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.