Some rental home investors may have a temporary window in time to take advantage of a rare tax law "twofer" -- profiting from not just one, but two of the latest changes to the Internal Revenue Code.

The opportunity flows from tax provisions in the recently-signed Housing and Economic Recovery Act of 2008. One change is the $7,500 tax credit for purchasers who haven't owned a home as a principal residence for the past three years.

The second change is for investors who HAVE OWNED a principal residence -- but who've also used the property as a rental investment. After next January 1st, investors will be limited in their ability to pull tax-free money out of sales proceeds on units they use for mixed purposes -- rentals and principal residence.

So how can tax-savvy investors make use of both changes? Well, this is not for everybody, but consider this example: Say you bought a house or condo in 2004 and lived in it for two years as your main residence. Then you rented it out, and continue to do so -- roughly three years of rental use.

Where does the tax "twofer" come in? After January 1, continued rental use will begin to limit the tax-free exclusion you'll be able to claim in future years on the house that, at least through 2008, qualifies for the maximum $250,000 to $500,000 capital gains exclusion on sale profits.

Renting out the house or condo for a couple of additional years -- and then selling -- will expose you to a limitation formula in which rental usage from 2009 onward becomes "nonqualified" for the tax-free exclusion, even if you later move into the property as your principal home.

Now for the other half of the tax law "twofer": If you sell and close this year, or before next June 30, and your buyer qualifies as a taxpayer who had not owned a home for three years, the buyers can claim the $7,500 tax credit on their federal income tax filings.

In other words, you can use the new, temporary tax credit to market and sell your property.

And if that property also happens to qualify for the full $250,000 to $500,000 capital gains exclusion available to sellers who've used a rental property for two of the previous five years as a principal residence, you get a double play: Tax free cash to you … AND a tax credit to lure your potential buyers.

Published: August 29, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.