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If you own a Steamboat vacation home or rental property in Steamboat Springs and plan to live in it full time to take the $500,000/$250,000 tax exclusion, the tax rules have changed. Owners of Steamboat investment property will lose some of the tax benefits when they convert their second home into a primary residence, then sell it to take the capital gain exclusion.

Until this year, homeowners could avoid paying taxes on profits up to $500,000 per couple ($250,000 for singles) as long as the Steamboat home owner lived in their vacation home for more than two years.

Under new rules, “the gain exclusion will be prorated by the amount of time the owner actually uses the property as a primary residence. No gain exclusion will be available for the amount of time the owner used the home as a vacation home or rental home (non-qualified use). The new rules don’t begin until January 1, 2009 so the loss of gain exclusion is only related for non-qualified use after December 31, 2008.

For example, if you bought property in Steamboat and rented it from January 1, 2000 until December 31, 2009 and you convert the property to your primary residence on January 1, 2010, you would only have one year of non-qualified use (January 1, 2009 – December 31, 2009). If you live in the house for two years and sell the house on January 1, 2012, you would exclude 11/12 of the gain on your tax return. This is because you owned the house for twelve years and only have one year of non-qualified use.

The exclusion rules are the same for Steamboat Springs home owners who convert their primary residence into a rental home or vacation home.

Disclaimer: If you have Steamboat Springs investment property, please consult your tax advisor or CPA about your specific situation. This post is for information only.