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Home Sale Exclusion Rules. I recently read an article by Kathy M Kristof, Los Angeles Times (http://www.latimes.com/business/la-fi-perfin10-2008aug10,1,3801011.column) regarding the new Housing relief law offering unexpected changes. I own a home in Washington state that has been on the market for 2 years without success in being sold because the local market is dependent upon California residents relocating to the Pacific Northwest which has dried up with the current housing crisis. I understand under the current law you can exclude $250,000 per person or $500,000 per couple in gains on the sale of a personal residence. To qualify you must have lived in the home for 2 years out of the previous 5. I built my home and occupied it in Oct.,1999 and lived in it full time until Dec., 2006 when I returned to Texas. I had calculated that to qualify for the exclusion on sale tax break that I had until Dec., 2009 to meet the 2 year use requirement within a 5 year window. Being retired and in good health, I do not see where I qualify for any of the 'unforeseen circumstances' that extends eligibility to qualify for the gains on sale. Apparently under the new law which is effective 1 Jan., 2009 taxpayers can exclude only the portion of the gain that corresponds to the 'qualified use' of the home to determine the percentage of the gain that is tax free. If my house is not sold before the end of 2008 and continues to be on the market in 2009 what will be the transition between the 2 programs and given the dates above what are the critical dates that I need to be aware of? When do I need to pack my bags and start moving back to the NW to lessen my tax exposure?

The new "qualified use" provision means that many people will have to pay taxes on at least a portion of their capital gain when a house is sold. Exactly how much will be something an accountant will have to figure out and the figure will be different for each tax return. The blanked $250,000 and $500,000 exemptions are history.

As I understand the new law, the provision of the old law will remain in effect until January 2009. After that, each unoccupied month will count against "qualified use." Since you will have 9 years and 2 months under the old law, your tax liability will grow slowly. If the house does not sell until January of 2010, for instance, you would have 12 months of non-qualified use and 110 months of use under the old law, so 12/122 or 9.8 percent of your gain for the entire period would be taxable.

This is the most aggressive interpretation of the law. If you counted 10/99 through 12/06 as your qualified use and 1/07 through 1/2010 as non-qualified use, the ratio of non-qualified use to qualified use would be 36/122 or 29.5 percent.

As a practical matter, this law actually benefits you. Under the old law you would lose your tax-exemption when you had not occupied the property in 2 of the preceding 5 years. That means every dime of gain would be taxable on any sale after 12/08. Because you have owned the property for a relatively long time, you'll be taxed on only a small portion of the gain after 12/08.

Scott