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Taxing Times for Your Home

October 31st, 2007 at 11:40 pm

Congress is looking for ways to raise taxes and your homes are in their line of fire.

On September 27, the Wall Street Journal reported that the House’s Ways and Means Committee has approved a bill under which homeowners facing foreclosure will not get a tax bill, if part of their debt is forgiven by lenders. Presently, forgiven debt is treated as taxable income to the borrower.

To pay for this tax break, the committee decided to eliminate the ability to sell your second home and pay no capital gains taxes on up to $500,000 in profits, when the home is your primary residence for two out of the last five years. A full explanation of this tax break is found on page 106 of the Financial Abundance Guide.

With the proposed tax policy, the capital gains tax break for a second home would be based on the number of years that the house has been your primary residence. The longer your second home has been your primary residence, the larger will be your capital gains tax break when it is sold.

If your second home has been your primary residence for two of the past five years and you are trying to avoid capital gains taxes on its sale, sell it quickly and hope that Congress does not make this change retroactive.

The second way that your home’s tax deductions may come under congressional fire was discussed in a Wall Street Journal editorial on October 6. As part of a tax bill to reduce CO2 emissions, John Dingle, chairman of the House’s Energy and Commerce Committee, is proposing to eliminate the mortgage deduction on homes over 3,000 square feet in size.

While the probability of this measure passing is low, it portends that large, “energy wasting” homes will be a future tax “target” for Congress. If you are in the market for a new home, consider a smaller, “energy efficient” one.

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