Capital Gains on personal residence

[DallasFlipper]

Regarding the new law about CG on personal residence - (unqualified use)

If I live in my personal residence for 4 years then I rent it out for one year at the
end of which I sell it - Do I owe any CG? assuming that the amount is below the $500K limit for married filing jointly.

Thanks

[mcwagner]

No.

[tatertot]

The way I read it, if you are living in the house (long enough for it to qualify as your residence) on the 1st of January 2010, and rent it after that date, the rented years aren't considered non-qualifying.

I'd be happy to hear other opinions.

Tax law would sure be easier if the government made a lick of sense.

[mcwagner]

must be your principal residence for 2 of the 5 years immediately prior to sale.

the facts as presented in the OP would indicate that any gain on the sale is not taxable.

[Dave T]

I disagree with all the responses you have received. 

The only useful response I can give you from the information you have provided is that the time your former primary residence was used as a rental from Jan 1, 2009 until the day it is sold is a period of non-qualified use.

The portion of your capital gain allocated to periods of non-qualified use are taxable and are not excluded from capital gains taxes even though your total profit might be less than $250K, or, $500K for a married filing jointly taxpayer.

In your scenario, IF the year of rental use started on Jan 1, 2009 or after, AND if your entire period of ownership is five years (four years occupied, one year rented), then 20% of your ownership is non-qualified use and 20% of your capital gain due to appreciation will be a taxable capital gain.  The other 80% of your gain due to appreciation can be excluded subject to the $250K per taxpayer limitation.

Of course, the portion of your profit due to unrecaptured depreciation is still taxable.  And, you must still satisfy the two of the last five year ownership and occupancy tests to exclude any of your capital gain.

I know that other supposedly authoritative sources have reported differently and would probably agree with Mark Wagner.  I read an article at MarketWatch.com and a blog posting done by Eva Rosenberg, an EA whose website is TaxMama.com, where both misinterpreted the language of the new law.