Tax preparers like to call the Taxpayer Relief Act of 1997, the "The Tax Preparers' Full-Employment Act" because it came with a complicated new round of tax rules.
But you could also call it the "Second Home Subsidy Act" because it gave home owners some extra money and many used it to acquire a second home for profit and for fun.
Second homes accounted for 5 to 10 percent of existing home sales before the last turn of the century -- before the tax relief became available. The data wasn't accurate and may have been underestimated because the sector wasn't closely watched until years later.
However, by 2005, second homes accounted for nearly 40 percent of all existing home sales. The National Association of Realtors says nearly a third, 27.7 percent of all existing homes purchased in 2005 were for investment purposes, while another 12.2 percent were for getaways, vacation homes.
In the mix were investment homes and vacation homes that later would become retirement homes and vacation homes that doubled as vacation rentals when the owners were at their primary residence and other second home uses.
Strong equity growth, windfalls from the pre-dot com bust stock market, growing incomes, savings and general wealth growth among baby boomers all helped fuel the seconds market.
The tax act was gravy, giving home sellers a greater share of their returns to move up or down with enough cash left over for a second property.
Of all the tax breaks on the house the relief act has become the most lucrative for home owners who use it.
When the 105th U.S. Congress passed H.R. 2014, its key provision was a rule that says when you sell your home, if you qualify, you can keep, tax free, capital gains of up to $500,000 if you are married filing jointly or $250,000 for single taxpayers, or married taxpayers who file separately.
To qualify for the $500,000/$250,000 exclusion, the home must have been your primary residence for at least two of the last five years.
The two-year primary-residence-use requirement doesn't even mean you must physically occupy your home every day for 730 days.
If you are away on a business trip or on an around the world cruise for several months, or otherwise not physically living in your primary residence for relatively short periods, that doesn't interrupt you from meeting the two-year requirement.
If you've met the two year requirement and for whatever reason must leave it vacant for extended periods, to retain the exclusion you'll have to sell it within the allotted five year period, or after five years are up, move back in to reestablish the two year requirement.
If you have a second home where you live, go to work, send the kids to school or otherwise treat as your primary residence, say every other year, it will take you four years to qualify either or both homes.
"Theoretically, you have qualified both homes to exclude taxes on the gain, but you can only take one and then must wait two years before you can take the other," said Marie Sternberger, an enrolled agent in Sunnyvale, CA.
The liberal law not only says you can take the exclusion on one home every two years, provided you qualify with the residency requirements, it also says you can take the exclusion as often as you meet the qualifications.
For example, if you have a rental property you move into after selling your first home and taking the exclusion, you can also exclude taxes on the gain from the rental-turned-primary residence, provided again, you meet the requirements.
You'll have to recapture any depreciation (depreciation is taxed at a federal tax rate of 25 percent) on the rental, of course.
Without the capital gains tax relief, you'd be paying a federal capital gains tax at the rate of (5 to 15 percent) on your capital gains, depending on your adjusted gross income.
Some states have varying provisions and continue to levy capital gains taxes. California, for instance, taxes the gain as income with a maximum tax rate of 9.3 percent.
The tax relief act also removed from the books, the $125,000 tax exclusion on capital gains for home owners older than 55 and the "rollover" law that allowed you to defer paying your taxes provided you purchased another, more expensive home. Those federal laws are history.
A related law also makes provisions for you if, through some unforeseen event, such as a job change, illness or some other hardship, you are forced to sell before you meet the two-year residency requirement.
You can prorate the $500,000/$250,000 exclusion (not your specific gain) if you are forced to sell early. That means if you only live in your home a year before you are forced to sell, you can exclude from taxes up to $250,000 in capital gains if you are married and file jointly or $125,000 for separate and single filers.
