Home Sale Tax Exemption

[cozumel86]

Is anyone aware of a change in the rules relating to the $250K ($500K for married couple) exemption from capital gains tax on the sale of one's primary residence? It used to be that you had to live in your primary residence for any 2 out of the preceding five years and take the total exemption. I'm hearing rumors that that has changed as of January 1, 2009.

[Martha]

Yeah, in some circumstances gain attributed to the time you did not occupy the home cannot be excluded from income. I believe that one of the landlords here (Calmloki?) posted a link to information but I am not finding it right away. Publication 553 is supposed to get updated to address the issue. Here is a link that talks about the issues: http://207.19.11.104:81/2000-05/oct08_3.htm

Note that the new rules only apply to "non qualifying uses" after January 1, 2009.

[ziggy29]

My *general* understanding (usual CYA about not being a lawyer or a CPA here) is that you can now only exclude a percentage of the capital gains according to the percentage of the time you used the house as a primary residence.

The general idea is this: If you owned a home for five years but only lived in it for two of those five, you'd only be able to exclude 2/5 of the gain since you used it as a primary residence only 40% of the time you owned it.

As this is tax law, there are always convolutions and exceptions and such, but this is the *general* idea behind the change. The presumed goal was to prevent someone from owning rental property for 18 years and then move into it for two years to exclude all the gain (of course, depreciation would still have to be recaptured).