Proposed Change to Primary Residence Exclusion Rules to Five out of Eight Years

One of the proposed provisions not getting much attention in the House Ways and Means Committee Chairman Dave Camp’s (R-MI)  “Tax Reform Act of 2014” is Section 1401 which would require a taxpayer to “own and use a home as the taxpayer’s principal residence for five out of the previous eight years” to claim the primary residence exclusion of up to $500,000 for joint tax filers ($250,000 for single filers) on the gain of the sale of their principal residence.

Impact to 1031 exchange properties

Some landlords of rental vacation homes often plan to sell their current principal residence when they retire and convert their investment property, which may have been acquired by a 1031 exchange, into a principal residence. Under current law they have to live in the property 2 out of the past 5 years before they can sell and claim the principal residence exclusion.

The principal residence exclusion is already limited on this converted property.  (Article:

The proposed change to five years out of  eight  will certainly impact those who convert their rental to a principal residence. This will greatly impact the homeowner who needs to move up due to a promotion or a growing family. It most certainly will impact the military homeowner.

The National Association of Realtors® has put together an excellent analysis of the Camp proposal and its impact to Real Estate.

Write your Congressmen and tell them to retain the “two out of five” whenever they consider tax reform.