BeachIn the past, one of the most lucrative tax loopholes for real estate investors was the provision that allowed an owner to move into a rental or investment property, and after living there for two years, realize and capital gains tax free, up to the individual $250,000 or married couple $500,000 limits.

In Minnesota, this benefit was especially attractive to those eyeing retirement in warmer climates. Why? Well, let’s say you wanted to retire five years from now. Both the Florida and Arizona real estate markets are, perhaps, in even more dire circumstances than the market here. Theoretically anyway, it might be a great time to pick up that vacation condo on the beach in Santa Barbara.

If you found a bargain, you could rent it out until you were ready to retire. It’s reasonable to assume that over enough time, that property will increase in value. Well, that appreciation is taxable. However, if you moved into the home for at least two years, Congress said they would not tax you on that increase when you sold.

As of January 1, 2009, that is no longer the case. When the president signed the Housing Bill into law two weeks ago, the rules changed.

Now, any properties purchased after that date will be subject to an amended version of this law. Investors will now be asked to pay capital gains taxes for the years of appreciation when they did not live in the property.  So, if you owned a condo in Phoenix for five years, and lived in it for two, you would be taxed for the three it was tenant occupied.

If you’ve been thinking of purchasing a vacation property, or an investment property to ultimately move in to, a wise strategy may well be to act before year’s end. In all the doom and gloom of the coverage of today’s market, not one prognosticator has ever said the market housing prices will never increase again. When they do, it would be awfully nice to be able to shield those gains.