Gain attributable to a period of non qualified use cannot be excluded. This means that a portion of the gain on a principal residence may be taxable if that home was a used other than as a principal residence. Period of non qualified use is any time after 2008 that the taxpayer (or his spouse or former spouse) does not use the home as a principal residence.
Example: You bought and start renting the home on January 1, 2007 for $200,000. On January 1, 2012 you converts the property into your principal residence, where you and your wife live until you sold the on January 1, 2014 for $350,000. Your total ownership period is seven years (2007 to 2013). However, 2009 to 2011 is a period of non qualified use since the home was not your principal residence during those years (years before 2009 are not counted). You must report a $64,286 gain, as follows:
Period of non qualified use 3 years
Total ownership period 7 years
Total gain ($350,000-$200,000) $150,000
Nonexcludable gain (3/7 x $150,000) $ 64,286
The remaining $85,714 (150,000 - $64,286) of gain can excluded under Section 121 because you meets the two-year ownership and use tests for the home and has not excluded another gain in the previous two year.