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The Two Year Ownership and Use Rule

By Vlad Lapochkin

If you didn’t already know; there is a great tax strategy tool called the Home Sale Exclusion that you can use to your benefit.

Here’s the most important thing you need to know: To qualify for the full $250,000

($500,000 if married filing joint tax return) home sale exclusion, you must own AND occupy the home as your principal residence for at least two of the five years prior to the sale. To qualify for the home sale exclusion, you don’t have to be living in the house at the time you sell it. Your two years of ownership and use may occur anytime during the five years before the date of the sale.

This rule has a very practical application: It means you may rent out your home for up to three years prior to the sale and still qualify for the exclusion as long as you prior satisfied two of the five years ownership AND residence rule. Also, you don’t have to spend every minute in your home for it to be your principal residence. Short absences, vacations, military leave are permitted.

NOTE: As of January 2009, new tax rules require that, if you sell a home that you  sometimes used as a vacation or rental property and sometimes as your primary residence, you’re eligible for only that portion of the capital gains exclusion that corresponds to the amount of time you actually lived there as your primary residence. Members of the military also get special home-sale consideration. Because of redeployments, soldiers often find it hard to meet the residency rule and end up owing taxes when they sell. But a law change in 2003 now exempts military personnel from the two-year use requirement.

Reduced exclusion may apply to taxpayers who do not meet two of the five years rule because of a change in health, place of employment or “unforeseen circumstances.”

CONCLUSION: Principal residence and vacation home sellers can avoid federal capital gain tax by careful advance tax planning. Consultation with personal tax adviser or Enrolled Agent prior to sale of property is strongly suggested.

To learn more about investor tax strategies, Contact Vlad Lapochkin at 702-769-7697 or [email protected]