2 Out of 5 Rule for Principal Residence Changes January 2009

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In all the news about meltdowns, there are some important tax changes that are getting buried. One of these is the change in how principal gain exclusion is calculated for principal residences.

The rule has been that if you lived in a home for 2 of the previous 5 years, that you could exclude up to $500,000 of gain if married, filing jointly and $250,000 if single. Effective January 2009 that has changed.

The new rule is that if you used the property first as something other than a principal residence (such as a vacation home or investment), that you must pro-rate the gain so that some is taxable and some is tax free.

If you have a property that has experienced gain, talk to your CPA before January 2009. There are actions you can take now to preserve the full tax free gain exclusion.

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