Q.  If we convert our investment property to our principal residence, how long must we live there before selling it and claiming the exclusion once again?

A.  The rule is similar to the above, whereby you must live in the property for two years.  However, the ownership period is extended to five years.  You can then sell the property and exclude a portion of your gain.  Tax will be due only on any depreciation taken after May 6, 1997.  Properties converted from investment or vacation use to a principal residence after December 31, 2008 may not receive a full exclusion of gain.

Q.  Must you buy another property to get the exclusion?

A.  No. The previous law (IRC 1034), which required you to purchase another property to "rollover?" your gain, was abolished in 1997.

Q.  Can you combine the principal residence exclusion and like kind exchange on the same property?

A.  Yes.  If you own a property, part of which you use as your principal residence and the remaining part as an investment property, you may use both the principal residence exclusion and a 1031 like kind exchange.  An easy-to-understand example is when you sell a duplex in which you lived in one-half as your principal residence and you rented out the other half as an investment property.  The gain on the portion in which you lived can be excluded and the gain on the part you rented out can be deferred using a like kind exchange.  The combination of the principal residence exclusion and like kind exchange applies to both the consecutive and concurrent uses of the property.

Q.  Are there any exceptions to the principal residence two year rule?

A.  Yes.  You may get a reduced exclusion if you must sell due to a job location change that qualifies for the moving expense tax deduction, health reasons, and unforeseen circumstances or if you convert an investment property to a principal residence after December 31, 2008, as defined in IRS Publication 523.

Q.  How old must you be to claim the exclusion?

A.  There is no age restriction. The previous requirement to be 55 or older to get a "once in a lifetime"exclusion of $125,000 was also abolished in 1997.

Q.  Do both married taxpayers have to own the property to exclude up to $500,000 of gain?

A.  No.  Only one spouse may own the property, but both must have lived in the property for two years and file a joint tax return for the year of sale to claim up to the $500,000 exclusion.

Q.  How often can you sell your principal residence and exclude the gain?

A.  Once every two years.  To exclude up to $500,000 of the gain, neither spouse can have excluded the gain from the sale of a principal residence during the past two years.

Q.  May the time we were away from our principal residence on vacation still be counted toward the two years we must live in the house to qualify for the exclusion?

A.  Yes.  Short temporary absences for vacations and other seasonal absences, even if you rent out the property during the absences, are counted as periods of use.

 Q.  If I use part of my principal residence for rental or business purposes, such as my garage, may I still exclude the gain on that part of the property?

A.  Yes.  You may exclude the gain on that part of the property, except for the depreciation taken.

      Q.  Where can I get more information?

      A.  Get a free copy of IRS Publication 523, Selling Your Home, by going to www.irs.gov.

           Call us at (609) 398-1031 for a free copy of our information package on Tax Deferred Exchanges and contact your tax advisor.