The New 2 out of 5 Year Rule | USTaxAid

Diane Kennedy's Blog

The New 2 out of 5 Year Rule

Written by Diane Kennedy, CPA on May 5, 2010

5-5-1For years, there has been a huge loophole for personal residences. It was the 2 out of 5 year rule. It used to be (notice the past tense) that as long as you lived in a property for 2 of the previous 5 years, you got to take advantage of a gain exclusion of $500,000 for married filing jointly and $250,000 if single.

It became a great little loophole where a couple with multiple residential properties that they had held for a number of years could sell without paying tax simply by moving into each property, individually, for 2 years.

Then the law changed, effective January 1, 2009. If you moved into a property after that date, your non-qualifying use after Jan 1/09 would hang with you forever. You didn’t get the 2 out of 5 year rule anymore.

5-5-2But there IS a loophole in this new law.

It’s all in reading the details. Here’s the loophole: You are allowed to take temporary absences from your primary residence. And temporary can mean up to two years, if you meet the other requirements.

If you’re planning to ever sell your house and you’re planning to have a profit when you do, then you want to make sure anytime you’re away, you’re going to meet the requirements!

There are still real estate loopholes these days. You just need to know where to look!

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