While Congress is working to address the foreclosure problem, they are tampering with the capital gain situation on houses as well. The same bill that addresses the foreclosure cancellation of debt tax issue also closes a tax loophole that many find popular. Here's the scheme....
A person purchases a house as a rental. After renting it out for a few years, they move into the house and make it their principle residence for two years. Then when they sell the house they can exclude from taxes $250,000 (or $500,000 if married and filing joint) of the gain.
Under the proposed law, the taxpayer must prorate the gain according to the time it was their principle residence versus other uses -- namely, a rental. Then only the portion that corresponds to period of time it was their principle residence can be excluded as above.
There are a number of finer points to this, and the proposed law disregards time periods before January 1, 2008. For more information, see your Enrolled Agent or CPA specializing in taxes.
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