Change to IRS Rules Excluding Capital Gains from Sale of Principle Residence

Included in the Housing and Economic Recovery Act of 2008 passed last October was a new restriction on how much capital gains from the sale of your principle residence you can exclude from income taxes. This change relates to rental properties or second homes that were subsequently converted to your principle residence. Basically, "the exclusion from capital gains recognition will be reduced by the amount of time the property was not used as a principal residence". It does not apply to situations where you rent out the home after you lived in it as your principle residence for two years or more.

Simple example 1 -- Buy a home and live in it for three years, then rent it for two years. You can exclude up to $250,000 ($500,000 for married couples filing jointly) -- no change.

Simple example 2 -- Buy a property and rent it out for three years, then live in it for two years. You can only exclude two fifths of the capital gains.

These rules are complicated and my examples are intended only to alert you to the change -- certainly not as individual tax advice. We always recommend talking to your professional tax advisor for guidance in your specific situation.