Tax break on capital gains narrows

[outtarentals]

As expected, a bill has been passed limiting the capital gains tax break when a rental property is converted to a principal residence for 2 years out of the 5 years before the sale for any property puchased after Dec 31st, 2008 -at least that's what I think it means

Here's part of the article from last Sat's Washington Post - google for the rest:

TAX BREAK ON CAPITAL GAINS NARROWS
By Kenneth R. Harney
Saturday, August 9, 2008; Page F01

Deep in the nearly 700 pages of the new housing bill is a complicated change in the tax code that could affect substantial numbers of people who purchase second homes or investment real estate in the coming decade with an eye to occupying those homes as their main residence later.
The bill narrows the use of the code's tax-free exclusion that allows sellers of principal residences to escape taxation on the first $500,000 of their profit (married joint-filers) or $250,000 (single-filers). Under current law, sellers can claim the full exclusion if they have used a property as their principal residence for at least two of the five years preceding a sale.

That eventually caught the eye of Congress. Last year the House approved a bill that would ratchet down the rules on such transactions by distinguishing between "nonqualified" periods of rental or investment use and "qualified" periods of principal residence use. It resurfaced this year in the housing bill as a "revenue offset" -- a way to raise an extra $1.4 billion over the next decade.

Bottom line: If you plan to buy, live in or sell a second home or rental investment property after Jan. 1, be aware of the new allocation formula.