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Much has been made about the Housing and Economic Recovery Act of 2008 and its consequences. Undoubtedly, it contains a lot of things that the average American consumer will find advantageous and helpful, but hidden amidst all of the wordy language and the thickness of the document are a few things that perhaps have not been exposed as extensively as necessary.

For instance, tucked away towards the end of the document is a change on the Capital Gains Exclusion rule, and one that could affect sellers of real estate quite harshly.

Up until the enactment of the HERA, a home seller could gain up to $250,000 of profits derived from the sale tax-free, with only one condition: the seller had to have lived in the house for at least two of the past five years. Simple enough, right?

Not anymore. Now, under HERA, someone that wants to sell a home and wants to calculate how much of that profit would be tax-free would have to perform a relatively complicated formula: simplified, put the amount of days that the property has been the primary residence over the amount of days that they have owned the property, then multiply it by the profit.

For example: say that you have purchased a house exactly 3 years ago, but have only resided in the home for 2 years. 3 years equals 1,095 days, while 2 years equals 730 days. Divided, that means that you will derive about 67% of the profit as tax free. If your profit was $100,000, that means that you will gain about $67,000 tax-free. Undoubtedly, this equation can get monumentally more complex, but as a principle, the example applies.

Essentially, it means that the less you've lived in a house that you've owned, the less money that you can expect to claim as tax-free. It's not really a discouragement from selling property, but it is an unfortunate side-effect of an otherwise beneficial law.

It really does not seem that it will be like a big hamper on property sales; after all, the market was already in disarray and this will not force people to withdraw the prospective sales of their house. Instead, it is simply a way for our government to tax more and more money from any profits that we as citizens make.

Learn more about this author, Michael Mikolajczyk.
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