Main home $500,000 deduction

[Pacun]

Limit on exclusion of gain on sale of main home. Generally, gain from the sale of your main home is no longer excludable from income if it is allocable to periods after 2008 when neither you nor your spouse (or your former spouse) used the property as a main home.

Does this mean that the rule that you must have lived in the house as your primary home for three years out of the last five years is no longer in effect?

[David1980]

Sort of.

The Housing Assistance Tax Act of 2008 requires that the exclusion be prorated starting Jan 2009. The Schedule D instructions refer to Pub 523 for this situation, however Pub 523 is still the 2008 version on the IRS website.

There will probably be a worksheet in the new Pub 523 when released with the actual calculation.

This was done to close the loophole where an investment property could have it's gain excluded if the taxpayer simply moved into it for two years before selling. Excluding $250k($500k) every 2 years was a sweet deal indeed, if you were willing to invest in homes that you were willing to live in.

I think it's just a simple pro-rated calc. IE, taxpayer lived in it for 2 years, rented it out for 2 years, they would have 50% of the exclusion. But because it wasn't retroactive, periods before Jan 2009 of nonqualified use aren't used in the calc. So if taxpayer sold home 12/31/09, rented it the whole year, rented it for the prior year, and lived it in the two years prior to that they would have 2 years qualified and 2 years non-qualified use, but only one of those years of non-qualified use is used in the calc so they get 66% of the exclusion.

ATX might already have a worksheet for this, or maybe just wait for 523?

[Don in Upstate NY]

Sort of sort of.

It's a little more complicated than that. The portion of gain that cannot be excluded is the total period of non-qualified use divided by the total period of ownership. And the total non-qualified use does not include any non-qualified use before January 1 2009 nor any non-qualified use after the last period of qualified use. (Renting out a house before it's sold does not hurt you; moving into your rental to get the exclusion doesn't work as well as it used to.)

But then you still need the two out of last five to get the (prorated) exclusion, subject to the same old exceptions.

I agree - wait for the pub and worksheet if you can.

[Pacun]

"But then you still need the three out of last five to get the (prorated) exclusion, subject to the same old exceptions."

Isn't it 2 out of 5?

If it is 2 out of 5, KC, please correct my subtitle.

[Don in Upstate NY]

"But then you still need the three out of last five to get the (prorated) exclusion, subject to the same old exceptions."

Isn't it 2 out of 5?

Thank you - you're correct. I had a senior moment.

Don