Hello again kshand,
Years ago, the IRS
used to allow taxpayers who sold their primary homes to reinvest the sales
proceeds in to another home, and in doing so they deferred any tax which was due.
Those rules changed quite a number of years ago, and were replaced with the $250,000 exclusion. The exclusion only applies to the sale of your primary residence, and does not apply to any other properties such as a vacation home or rental properties
In order to qualify as your primary home, you must meet both the ownership and use tests that I mentioned earlier. The only exception at all that is allowed is if you purchase a home and then you are forced to sell it before having owned it for 2 years, if the reason for the forced sale was due to job relocation or medical
reasons. In such a case, you would be allowed to exclude a prorated portion of the $250,000.
But there are no exclusions allowed at all for the use test. Once you have owned the home for at least 2 years, you must then also satisfy the use test by actually living in that home for at least 2 of the last 5 years preceeding the sale. I suppose the IRS view on this is that if you moved out of the home 3 years ago, that would have been adequate time to sell the property and still claim the exclusion. Because of that, they do not allow any longer of a time frame for the sale of the home and have it still qualify for the exclusion.
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Thank you kshand.