THE TAX ATTIC with Jerry Coon

Rules for owning two residences

Jerry Coon

It’s time to review the rules for taxpayers who are unlucky enough to own two residences at the same time. Dating back to when Proposal A passed, we voted that every homeowner can designate one principal residence for the Principal Residence Exclusion (PRE). The advantage of having the PRE designation is that the 18 mills of school operating millage is waived. For taxpayers who have a home with a taxable value of $80,000, the PRE saves the taxpayers 18 times 80, or $1,440. For taxpayers with a house with a taxable value of $125,000, the tax savings are 18 times 125, or $2,250.

Needless to say, for all of us homeowners, that PRE designation is extremely important. In normal times, because the PRE does save so much tax money, we are only allowed to have one home at a time designated as a PRE. Sell one home and lose the PRE on that home.

At the sale, one of the many pieces of paper that gets signed is a Form 2602, Rescission of Principal Residence Exclusion. The closing company passes that form on to the local assessor.

Buy another home and at that closing, one of the many pieces of paper signed is the Form 2368, Application for a Principal Residence Exclusion. The closing company also passes that form on to the local assessor and the buyers get the PRE on the new home. I do recommend that taxpayers check with the local assessor to ensure the PRE application was received. Some things are important enough to follow up with a telephone call and it may be a $1,440 or $2,250 telephone call.

We also all know we are not living in normal times. For example, a Grand Rapids job for a Rockford resident that was thought to be secure on Friday afternoon is eliminated on Monday morning. A replacement job, after a lengthy search of a year, is found in the Port Huron area. The taxpayer rents an apartment in Port Huron while the family stays in Rockford just to make sure the job is going to work out. After two months, it is apparent the job is going to work, so they look for a home there and the home in Rockford is put up for sale. They find a nice home at a great price because the previous owner now lives in Indianapolis due to his Port Huron job being eliminated. The closing is set for 90 days. That gives the taxpayers 90 days to sell the Rockford home.

Owning two homes with two mortgages is not a pleasant thought. The 90 days goes too quickly and the Rockford home is not sold. The Port Huron home is purchased and the PRE application is made. Normally, the PRE on Rockford would have to be rescinded. In normal times, the home would have been sold and the PRE rescission would have occurred naturally. Fortunately, our legislature recognized a few years ago that this is an all-too-common scenario. They passed a provision allowing taxpayers stuck in this exact scenario to keep the PRE on two residences. Our legislature does use common sense once in a while. Of course, that was a few years ago and I can’t vouch for anything they have done since then.

By filing a Form 4640, Conditional Rescission of Personal Residence Exclusion, the taxpayers can keep both PREs in place for up to three years. The extension request is good for only one year at a time so the request must be made each year. The first year, the application must be made by May 1. File the application for May 1, 2010 for the 4640 to be in effect for the 2010 tax year. For the 4640 to be in effect for 2011, it must be made by December 31, 2010. Skip a year and lose the PRE exclusion for that year.

The following requirements must be met in order to qualify. First, the home cannot be rented out. Second, the house must not be occupied. Third, the house must not be leased. Fourth, the house must not be used for a business or commercial purpose. Meet these four requirements and the PRE can remain in effect for up to three years. Once the house is sold, the 2602 is filed by the title company and the PRE is rescinded.

This won’t make the pain of paying two mortgages at once go away, but it will relieve some of that pain. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service in Rockford. Contact Jerry
at www.actiontaxservice.com.

 

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