Homeowners get tax breaks in housing bill

The main focus of the bill was on its provisions to stave off foreclosures and to bail out mortgage giants Freddie Mac and Fannie Mae. But there are also measures of interest to people with vacation homes, first-time home buyers or those planning to buy a home who haven't owned one in three years, and homeowners who don't itemize their federal tax returns.

Here's a rundown:

Vacation homes

The housing bill closes a provision that some people with vacation homes had used to avoid paying tax on the appreciation realized on their vacation properties when they sell.

You might wonder: What does this have to do with solving the housing crisis? Nothing, really; it is designed to raise revenue and help pay for the other tax breaks in the bill.

The provision has allowed someone with a vacation home to get a tax break, providing he or she is willing to live in it for at least two years before selling it.

Under current law, taxpayers can exclude up to $250,000 per person, or $500,000 per couple, in gains on the sale of a personal residence from federal tax.

Because tax law defines a personal residence as the place where the taxpayer has lived for two of the last five years, people with vacation homes can move in for two years, sell the home and then move back to their primary residence.

But starting Jan. 1, 2009, taxpayers can exclude only the portion of the gain that corresponds to the "qualified use" of the home. That means the taxpayer will have to divide the number of years lived in the residence by the number of years it was owned to figure out what percentage of the gain is tax-free, said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

Here's an example: If you bought the house in 2009 and owned it for 10 years but lived in it for just two, only two-tenths of the gain would be tax-free.

Even if the home appreciated in uneven fashion (as homes often do), the tax law says you have to act as if the appreciation was earned evenly throughout the time period that you owned it.

The good news is that Congress also put in a generous transition period, he said. Only the period following the law's 2009 start date will count in the "non-qualified use" portion of the home-sale calculation.