Under the current law if you sell a property that has been your primary residence for 2 out of the past 5 years, you may exclude up to $250,000 of the capital gains from your taxable income. $500,000 for a married couple. This is true even if the property has been used as a rental, as long as you meet the time period requirement. Investors that have acquired the property thru a 1031 exchange and owned the property for at least 5 years can also use this provision.
Under the new rules of the Housing Assistance Act of 2008,which take effect Jan. 1, 2009, the amount of gain for exclusion will depend on a ratio between an amount of qualified and unqualified use of the property. Qualified use is defined as any use of the property as a primary residence. Nonqualified use is defined as any use of the property other than as a primary residence, including a second home, vacation property, a rental or investment property. The ratio period is based on the length of ownership. Only the qualified use portion is available for exclusion from taxable gain.