Second-home sales could see higher taxes

WASHINGTON - The House Ways and Means Committee, seeking revenue to help homeowners in foreclosure, unanimously approved higher taxes on the sale of vacation homes.

The panel adopted a Democrat-drafted provision that would make it harder for people who sell their second homes to exclude as much as $500,000 in profit from capital-gains taxes. The provision would raise $2 billion in additional taxes over the next decade, according to an estimate by the congressional Joint Committee on Taxation.

Democrats have pledged to pay for tax breaks with offsetting tax increases or spending reductions. The proposal, intended to help fund a measure to protect mortgage borrowers from taxes on debt forgiven in a foreclosure, would gut a popular tax-saving strategy, Republicans said.

"It seems to me to be a luxury tax" that will affect coastal areas, mountain states, and resort areas, said Representative Sam Johnson, a Texas Republican.

Other Republicans such as Representative Pat Tiberi of Ohio complained that the provisions would mean permanent changes, and the Bush administration had asked that similar measures be put in place for only three years to address a temporary problem.

Committee Chairman Charles Rangel, a New York Democrat, cited support for the provision from industry trade groups such as the National Association of Realtors, the National Association of Home Builders, and the Mortgage Brokers Association. The measure, which must still be approved by the House and the Senate, also would extend the deduction for private mortgage insurance.

"Families dealing with the pain of a foreclosure should not have the double whammy of a large tax bill for terminating their mortgage through no fault of their own," Rangel said.

In a letter to lawmakers, the Realtors association said the vacation-home provision "does not eliminate any tax benefit but rather tightens the requirement" for qualifying for the exclusion from capital-gains taxation on the sale of a home.

Michael Desmond, tax legislative counsel at the Treasury Department, said the Bush administration had favored a temporary provision, but would back the measure. Some analysts said they were surprised by the administration's position.

"I thought vacation homes were something of a sacred cow," said Mel Schwarz, a partner in the national tax office of the accounting firm Grant Thornton LLP in Washington, D.C. "This would shut down what has become a popular planning tool."

US law generally allows married homeowners to exclude as much as $500,000 in profit on the sale of a second home, provided the owners have lived in it for at least two out of the previous five years. Amounts more than $500,000 are taxable at rates as high as 15 percent. The exclusion amount is $250,000 for unmarried homeowners.

Americans who own two homes frequently sell one and live in the other for two additional years to claim the benefit twice, which is permissible.

The proposal adopted yesterday would let only a portion of the profit on a vacation home be excluded from tax, depending on how long the property has been owned rather than occupied.

For example, if a married couple owned a vacation home for eight years, then lived in it for two years before selling, only 20 percent of their profit would be eligible for the capital-gains exclusion.

The Realtor group applauded the broader legislation, which would spare homeowners who have their mortgages forgiven from a surprise tax bill from the Internal Revenue Service; US law generally taxes the value of forgiven debt as high as 35 percent. The legislation would be effective retroactive to Jan. 1

More than 2 million Americans are likely to lose their homes as low introductory interest rates on mortgages are reset to higher levels and borrowers struggle to make payments, according to the Center for Responsible Lending.