IRS Publication 554 — Tax Guide for Seniors

To claim the exclusion, you must meet the ownership and use tests. These tests generally require that during the 5-year period ending on the date of the sale, you must have:

• Owned the home for at least 2 years (the ownership test), and

• Lived in the home as your main home for at least 2 years (the use test). The 2 years of residence can fall anywhere within the 5-year period, and it doesn’t need to be a single block of time.

Exception to use test for individuals with a disability. There is an exception to the use test if, during the 5 -year period before the sale of your home:

• You become physically or mentally unable to care for yourself, and

• You owned and lived in your home as your main home for a total of at least 1 year.

If you qualify for this exception, you are considered to live in your home during any time that you own the home and live in a facility (including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition.

If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Exception to ownership test for property acquired in a like-kind exchange. If you acquired your main home in a like-kind exchange, you must own the home for 5 years before you qualify for the exclusion. This special 5 -year ownership rule continues to apply to the home even if you give it to another person. A like -kind exchange is an exchange of property held for productive use in a trade or business or for investment in which no gain or loss is recognized. See Pub. 523 for more information. Period of nonqualified use. Generally, the gain from the sale or exchange of your main home won’t qualify for the exclusion to the extent that the gain is allocated to periods of nonqualified use. Nonqualified use is any period after December 31, 2008, during which the property isn’t used as the main home. See Pub. 523 for more information.