PrintSeptember 27, 2007
Congress moving to penalize the prudent?
Instead of attacking what I suspect was massive tax cheating on the sale of residential real estate in the lower to mid level price range, Congress is now proposing to penalize those who planned ahead and bought their retirement homes early. They will do this by denying them part of the exclusion of gain from tax when the home is later resold. The law currently allows for the exclusion of up to $500,000 in gain ($250,000 for singles) if the property has been the taxpayers' principal residence for any two out of the last five years, and Congress would make it harder to qualify for this.
Look for a great many unhappy people if this is enacted. That's because a good many retirees end up moving again within a few years of retirement for health or family reasons. Others discover that living year round at one location is not the same as visiting the place for three or four weeks at the best time of the year, or that the fantasy of living somewhere wasn't all they thought it might be.
I think this provision is unfair because it penalizes those who planned ahead for retirement by locking in on desirable locations where real estate values will probably continue to increase. I would be for all for tighter enforcement in this area, but the bill does not seem to address the far bigger issue of people claiming the exclusion for homes that never were their residence.
There is anecdotal evidence that cheating has been rampant in the area of home sales. If the address never showed up on the seller's driver's license, voter registration, tax return, bank/brokerage statements, etc. it probably wasn't a qualifying residence no matter how long the seller owned it. But some people found out this was an easy place to cheat because the proceeds from the sale of residential real estate wasn't reported to the IRS when the price was under the exclusion amount and they provided their realtor with a statement the sale qualified for the tax break. Relying on statements to commissioned sales people has serious flaws as an enforcement mechanism.
A lot of the speculation that contributed to the real estate market crash came from people abusing this exclusion. They used low adjustable rate mortgages to buy a second house they never intended to move into, planning to flip it for a fast and tax free gain before the higher mortgage rate kicked in. Requiring realtors to report the gain on all sales to the IRS would be a step in the right direction.
