Sale of Home

[Questionguy101]

I have a question about the "days of non-qualified use" of the sale of a former primary residence.

In Pub 523, it says:

"A period of nonqualified use does not include:

Any portion of the 5-year period ending on the date of the sale or exchange that is after the last date you (or your spouse) use the property as a main home"

Does anyone understand what they are saying in the above statement? I have read it back and forth for 30 times and I still could not figure out what they are talking about there. Thanks.

[Bees Knees]

It means any use during the last 5 years after the last day it is used as a principal residence is not considered nonqualified use.

Example #1: Taxpayer purchased a home in 1964 and uses the home from 1964 through 2009 as a principal residence. In 2010 and 2011, taxpayer rents out the home to a renter. At the end of 2011, taxpayer sells the home at a gain. The two years the taxpayer rented the home to a renter after moving out is not considered nonqualified use. Thus, the taxpayer can exclude the entire gain.

The purpose of the nonqualified use rule is to prevent taxpayers from converting long standing rental property into a principal residence merely for the purpose of excluding the gain.

Example #2: Same as example #1 except it is the reverse. The taxpayer used the home from 1964 to 2009 as rental property. In 2010 and 2011, the taxpayer kicked out the renters and moved in, using it as a principal residence. At the end of 2011, taxpayer sells the home. Prior to the nonqualified use rules, the taxpayer would have been able to exclude the entire gain because the home was used as a principal residence for 2 out of the last 5 years. Now, the taxpayer has to pay tax on the part of the gain that is allocated to nonqualified use, the time period prior to it being used as a principal residence.

[Questionguy101]

It means any use during the last 5 years after the last day it is used as a principal residence is not considered nonqualified use.

Example #1: Taxpayer purchased a home in 1964 and uses the home from 1964 through 2009 as a principal residence. In 2010 and 2011, taxpayer rents out the home to a renter. At the end of 2011, taxpayer sells the home at a gain. The two years the taxpayer rented the home to a renter after moving out is not considered nonqualified use. Thus, the taxpayer can exclude the entire gain.

The purpose of the nonqualified use rule is to prevent taxpayers from converting long standing rental property into a principal residence merely for the purpose of excluding the gain.

Example #2: Same as example #1 except it is the reverse. The taxpayer used the home from 1964 to 2009 as rental property. In 2010 and 2011, the taxpayer kicked out the renters and moved in, using it as a principal residence. At the end of 2011, taxpayer sells the home. Prior to the nonqualified use rules, the taxpayer would have been able to exclude the entire gain because the home was used as a principal residence for 2 out of the last 5 years. Now, the taxpayer has to pay tax on the part of the gain that is allocated to nonqualified use, the time period prior to it being used as a principal residence.

Now I can make sense out of the statement after I know the purpose of the statement.

Thank you Bee. Bug help. Thanks!!!