NORTHERN CALIFORNIA REGION
The housing Assistance Tax Act of 2008, signed by President Bush on July 30, 2008, includes a modification to the Section121 exclusion of gain on the sale of a primary residence.This modification may affect taxpayers who exchange into a residential property, and then later convert the property to a personal residence, as explained below.
not eligible for exclusion.
then sold the residence and realized $300,000 of gain. Under prior law, the taxpayer would be eligible for the full $250,000 exclusion and would pay tax on $50,000. Under the new law, the
exclusion would have to be prorated as follows (the example does not take into account deprecation taken after May, 1997, which is taxable anyway).
three years of primary residential use, only the 2009 rental period would be considered in the allocation for the non qualified use. Thus, only one-sixth (1 out of 6 years) of the gain would be ineligible for the exclusion.
taxpayer converts a primary residence to a rental and never moves back in, and otherwise meets the two out of five year test under Section 121, the taxpayer is eligible for the full $250,000 exclusion when the rental is sold. This rule only applies to non qualified use periods within the 5 year look back period of Section 121(a) after the last date the property is used as a principal residence. Therefore, if the taxpayer used the property as a principal residence
in year one and year two, then rented the property for years three and four, and then used it as a principal residence in year five, the allocation rules would apply and only three-fifths (3 out of 5 years) of the gain would be eligible for the exclusion.