Nonqualified Use after 2008
Even if you meet the two-out-of-five year test for the primary residence
exclusion, gain attributable to "nonqualified" use after 2008 will not
be eligible for the exclusion on a later sale.  The primary intent of this
rule is to deny an exclusion for some of the gain realized by taxpayers
who convert a vacation home or rented residence to their principal
residence and live it it for a few years before selling.

The law as written, treats any period in 2009 or later for which the home
is not used as a principle residence by you as "nonqualified use".


Determining the Excludable Gain
To figure the exclusion on a sale where there is nonqualified use after
2008, the gain equal to post May 6, 1997 depreciation is taken into
account first.  No exclusion is allowed for this depreciation amount; this
is a long standing rule that is not changed by the nonqualified use
calculation.

The portion of the remaining gain that is allocable to nonqualified use
will not be eligible for the exclusion.  The allocation is made by
multiplying the gain by the following fraction:

     Total nonqualified use during the period of ownership after 2008
  --------------------------------------------------------------------------------------------------
                                   Total period of ownership


Example:  Chad Krause buys a house on January 1, 2009 for $350,000
and uses it as a rental property for two years, claiming $20,000 of
depreciation deductions.  On January 1, 2011, he converts the property to
his principal residence. 

On January 1, 2013, he moves out and sells the home for $650,000 on
January 1, 2014.  Gain on the sale is $320,000 ($650,000 sales price -
$330,000 basis ($350,000 - $20,000 depreciation)).  The $20,000 of
depreciation is recaptured as income; as under prior law.  Of the
remaining $300,000 gain, 40% is attributable to a nonqualified use;
during the five years the home was owned by Chad, it was used as
rental property for two years (2/5 = 40%).  Thus, $120,000, of the gain
(40% x $300,000) does not qualify for the exclusion and is taxable.  The
$180,000 balance of the gain ($300,000 - $120,000 allocated to
nonqualified use) is excluded from income; as it is less than the $250,000
primary residence exclusion limit.

Click here to leave primary residence exclusion nonqualified and return
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