A provision in The Housing and Economic Recovery Act affects vacation homes and nonqualified residence rental units.

A provision in The Housing and Economic Recovery Act of 2008 (P.L. 110-245) amended the home sale exclusion rules of Internal Revenue Code Section 121. This change affects homeowners that move into a nonqualified residence they already own – i.e., a vacation home or rental unit. It is designed to prevent taxpayers from simply moving into their vacation home for two years and then obtaining the entire exclusion.

Under the old law, to exclude gain on the sale of a home, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The ownership and use periods did not need to be concurrent in order for the taxpayer to obtain the maximum benefit of the exclusion.

The new rule, however, provides the owner only gets a percentage of the exclusion based on a ratio of how long the property is their primary residence divided by how long they owned the property.

Summary provided by:
Brian Stegeman, Associate
(612) 252-2861

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