Section 3092 of HR 3221 (The Housing Assistance Tax Act of 2008)
This law was originally designed to give investors a great way to exclude money from income taxes for
retirement by allowing a 1031 exchange to purchase a property and if one day an owner wanted to cash out;
up to $250,000 of income could be excluded from income taxes! The way to do this was to personally live in
the asset for 2 of a 5 year period and then sell using a lifetime maximum exclusion of $250,000 per person to
retain the profits untaxed...but, no more..
Under current law, if you sell a property that has been your personal residence for at least two of the past five
years, you may exclude from your taxable income up to $250,000 of the capital gains ($500,000 for a married
couple lifetime exclusion).
Under this legislation, a ratio method is used. The ratio actually increases the amount of income taxes you will
pay based on the length of time you actually occupy the property. The more time you spend there, the more of
a percentage exclusion you will receive. Qualified use is defined as any use of property as a primary
residence. Non-qualified use being any use of property other than as a primary residence, including use as a
second home, a vacation property, a rental or investment property or use in a trade or business. The ratio
period is based on the length of ownership of the property. Only the qualified use portion is available for
exclusion from taxable gain.
So as of January 1, 2009, be aware only unqualified use after that date will be taken into account on new
New rules Example: : You acquire a property in 2009. Your basis in it is $200,000. You rent it out for three
years and then occupy it as your personal residence. In 2014, five years after acquiring it, you sell for
$400,000, with a gain of $200,000. Three of the years, 60% of the ownership period, were of non-qualified use.
Thus 60% ($120,000) of the gain will be taxable. Just 40% of the gain ($80,000) represents the qualified use of
the property and may be excluded from taxable (capital gain) income.
The rule appears as an amendment to the Internal Revenue Code. So keep your money safe and consult with
a real estate tax attorney regularly.