Ownership and use tests for a home sale

You generally need to satisfy both the ownership test and the use test to qualify for the home sale exclusion. Your ownership test concerns how long you owned the property. Your use test concerns how long you lived there as your main home. You must satisfy each requirement during the 5 years ending on the date you sell or exchange the home.

You meet the ownership requirement if you owned the home for 2 years or more within that period. Your qualifying occupancy must total at least 2 years inside that window. Your use requirement calls for a main home, so ownership alone does not satisfy both tests.

If you meet the applicable conditions, you may exclude up to $250,000 of gain from your income. Your exclusion limit can increase to $500,000 if you are married and file jointly. Your eligibility for that larger joint limit depends on additional requirements involving both spouses.

Your ownership and use periods do not have to be the same 2 years. You can meet the ownership test during one period and the use test during another. You must still fit both qualifying periods within the 5 years ending on your sale date.

Your qualifying ownership and use periods must each total at least 2 years. The statutory requirement refers to periods totaling 2 years or more. You therefore do not need to establish that your qualifying ownership and use occurred during identical periods.

You do not have to use the property as your principal residence on the sale or exchange date. You can satisfy the tests through qualifying ownership and main home use earlier in the applicable 5 year window. You must still account for the separate rules governing depreciation and nonqualified use.

You generally must occupy the residence to satisfy your 2 year use requirement. Your ownership of the home does not replace that occupancy requirement. However, you can count short temporary absences, such as vacations or other seasonal absences, as periods of use.

You can count those short temporary absences even if you rent the residence during them. This rule applies to the short temporary absences described in the regulation. You cannot treat every rental period as qualifying occupancy merely because you continue to own the home.

Your occupancy requirement and the rules allocating gain to nonqualified use address separate conditions. You can meet your ownership and use tests while still having gain that you cannot exclude because it is allocated to nonqualified use. You can also have gain that remains ineligible because it equals depreciation allowed or allowable after May 6, 1997.

If you file jointly, either you or your spouse must satisfy the ownership requirement for the $500,000 exclusion limit. You and your spouse must each satisfy the use requirement. Neither of you can be ineligible because of another sale or exchange that used the exclusion during the applicable 2 year period.

You do not need joint ownership to satisfy the ownership condition for that larger limit. One spouse can meet the ownership test. You still need both spouses to meet the use test individually, along with the restriction on a previous excluded sale.

If you do not satisfy the requirements for the $500,000 joint limit, your joint limit is the sum of the limits you and your spouse would each have if unmarried. For that calculation, you each receive credit for ownership during any period either spouse owned the property. Your use requirement remains a separate condition.

You generally cannot apply the exclusion to your current sale or exchange if you had another sale or exchange to which the exclusion applied during the 2 years ending on your current sale date. This restriction concerns your previous use of the exclusion. If your sale is because of a change in place of employment, health, or unforeseen circumstances to the extent provided in regulations, you may qualify despite failing the ownership and use requirements or the restriction on a previous excluded sale, with your applicable exclusion limit multiplied by the shorter of your qualifying ownership and use during the 5 years ending on the sale date or the time since your most recent excluded sale, divided by 2 years.

If you are a surviving spouse whose own ownership and use fall short of the 2 year requirements, you can count your late spouse's ownership and use. You may qualify for a $500,000 exclusion limit if you are unmarried on the sale or exchange date, sell no later than 2 years after your spouse's death and met the joint limit requirements immediately before the death. Those requirements mean either you or your spouse met the ownership test and both of you met the use test. Immediately before your spouse's death, you both needed eligibility under the rule limiting excluded transactions to one per 2 years.

If you convert a rental property into your main home, satisfying the ownership and use tests does not necessarily let you exclude all your gain. You cannot exclude gain allocated to periods of nonqualified use. Your allocation generally compares your total periods of nonqualified use during ownership with your total ownership period.

For this allocation, your nonqualified use generally includes periods beginning January 1, 2009, when neither you nor your spouse or former spouse used the property as a principal residence. You do not include periods before that date in your nonqualified use numerator. Your allocation remains subject to the statutory exceptions.

You exclude from nonqualified use any portion of the applicable 5 year period after the last date you or your spouse used the property as a principal residence. You must still satisfy the ownership and use tests within the applicable window. Your rental use after moving out therefore does not remove those tests.

You also exclude up to an aggregate of 10 years when you or your spouse serve on qualified official extended duty in the uniformed services, Foreign Service or intelligence community. Another exception covers temporary absences totaling no more than 2 years due to employment changes, health conditions or other unforeseen circumstances specified by the Secretary.

You apply the nonqualified use allocation after the rule for gain attributable to depreciation. You disregard gain subject to that depreciation rule when calculating the gain allocated to nonqualified use. You can use Worksheet 3 to figure the portion allocated to nonqualified use.

If you were entitled to depreciation deductions because you used your home for business or as rental property, you cannot exclude the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This limit applies even when you meet your ownership and use tests. Your depreciation limit includes allowable deductions, rather than only deductions you actually claimed.

If you acquired your home in a Section 1031 exchange in which gain was wholly or partly unrecognized, you cannot apply the home sale exclusion to a sale or exchange during the 5 years beginning on your acquisition date. This restriction also reaches a sale by someone whose basis is determined wholly or partly by reference to your basis.

Your exchange restriction measures 5 years forward from acquisition. Your ordinary ownership and use tests look at the 5 years ending on your sale date. Meeting your 2 year ownership and use requirements does not remove the separate restriction for property acquired in that kind of exchange.

You can choose to pause the testing clock during your own or your spouse's qualified official extended duty as a uniformed services member, United States Foreign Service member or intelligence community employee. Your election cannot extend the ownership and use testing period by more than 10 years.

Your duty must involve active duty under a call or order for more than 90 days or for an indefinite period. You must serve at a duty station at least 50 miles from the property or reside under Government orders in Government quarters. Your service must also fall within the statute's definitions of eligible membership or employment.

Your uniformed services eligibility follows the definition in title 10, section 101(a)(5), in effect when this provision was enacted. Your Foreign Service eligibility follows paragraphs (1) through (5) of section 103 of the Foreign Service Act, also using the definition in effect when this provision was enacted.

For intelligence community eligibility, you must be an employee under title 5, section 2105, of an organization or element the statute lists. Your eligible employer can include the Office of the Director of National Intelligence, CIA, National Security Agency, Defense Intelligence Agency, National Geospatial Intelligence Agency or National Reconnaissance Office.

You can also qualify through another Defense Department office collecting specialized national intelligence through reconnaissance programs. Your eligible employment can include intelligence elements of the Army, Navy, Air Force, Marine Corps, FBI, Treasury Department, Energy Department or Coast Guard. It can also include the State Department's Bureau of Intelligence and Research or Homeland Security elements analyzing foreign intelligence information.

You can have this election in effect for only one property at a time. You cannot make an election for another property while your existing election remains in effect. You may revoke your election at any time.