That’s right…that’s the way the IRS rules are today.<br /><br />But, the House has voted to change that and send the bill to the Senate for consideration.<br /><br />H.R. 3648, a bill to provide for mortgage cancellation relief passed the House by a vote of 386-27. To see how your member voted, please check out the roll call at:<br /><a href=”http://clerk.house.gov/evs/2007/roll948.xml”>http://clerk.house.gov/evs/2007/roll948.xml</a>.<br /><br />This legislation has stirred up some controversy over the “pay for”<br />provision, which is always a harsh reality of tax law changes. In order to “pay for” the mortgage cancellation relief, the House Ways and Means Committee modified, but did not eliminate, a tax planning opportunity for owners of vacation and rental properties.<br /><br />The new rule modifies the application of the exclusion when an individual converts a rental or vacation property to his/her principal residence. Under the new rule, effective January 1, 2008, the owner will still have the option of receiving the benefit of the exclusion, but will be required to pay capital gains taxes on the appreciation attributable to the time that the property was used as an investment property. The amount excluded will be a fraction, determined at the time the vacation/rental property is sold. Assuming that the owner has satisfied the 2-year residence requirement, the amount of gain that can be excluded will be determined by a fraction. The numerator of the fraction will be the number of years the property was used as a principal residence. The denominator will be the number of years the individual actually owned the property, measured from January 1, 2008.<br /><br />Thus, the legislation has no retroactive impact. Congress sought a policy that would provide a capital gains exclusion on a principal residence only for the time that the property was actually used as a principal residence.