Iâ€™m not a tax advisor or CPA -- anything I comment on below should absolutely be confirmed BEFORE taking any action to make sure all of your personal circumstances are weighed in making an informed decision.
Generally, under Section 121 of the Internal Revenue Code, a Seller can exclude up to $250,000 of the gain on the sale of a home if the Seller:
-Owned the home for at least 2 years during the 5-year period ending on the date of the sale (ownership test),
-Used the home as his or her principal residence for at least 2 years during the 5-year period ending on the date of the sale (use test); and
-Did not exclude gain from the sale of another home during the 2-year period ending on the date of the sale.
HOWEVER, for homeowners converting a second home or investment property into a primary residence, my understanding is the new Capital Gains Exclusion formula is no longer an all-or-nothing â€œ2 out of the last 5 yearsâ€ proposition.
INSTEAD, due to the Housing and Economic Recovery Act of 2008 passed into law Q308, which changed Section 121 Capital Gains Exclusion rules (effective 1/1/09) for homeowners moving into property formerly designated as a second home or investment property, the exclusion is now a ratio calculation based a home's actual usage as a primary residence over its qualified life, calculated as follows:
Capital Gains Exclusion =
(# of DAYS property was PRIMARY RESIDENCE) / (# of DAYS property was OWNED).
This is then multiplied by the (Profit from sale of the Property) to arrive at the exclusion amount.
There are many "twists & turns" concerning Tax Code Section 121/1031. Again, I would highly recommend you consult a tax advisor / CPA. Not knowing the actual rules is NOT a defense when dealing with the IRS!
Suggest you speak with a CPA!