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If a taxpayer gets a home as part of a divorce home settlement, the taxpayer's ownership period will include the time the spouse or former spouse owned the house. In addition a taxpayer is dealt with as having used the home as a principal home throughout the time the taxpayer owned the home and the taxpayer's partner or previous spouse was permitted to utilize itunder a decree of divorce or separationas a principal residence.

On January 1, 2001, Harry and Jennifer were divorced. Under the divorce decree, Jennifer is enabled to live in the house till February 1, 2002. Harry sells the home on March 1, 2002. Harry and Jennifer could both meet the two-year ownership and use requirements. Although Harry lived in the home for just 12 months, if he continues to own it he is also considered to have lived in the home for the 13 months Jennifer lived there.

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CPAs might wish to suggest that separating house owners who have not fulfilled the two-year ownership and use requirements consider having the divorce or separation decree need that one spouse stay in the home till the two-year use requirement is fulfilled.  Learn More Here  proposed regulations specify three major limits on a taxpayer's capability to claim the section 121 exemption: Disallowance for usage or partial usage of the home as a nonresidence.

The once-every-two-years restriction. If a taxpayer likewise uses a home for functions other than as a primary home, the gain exemption does not apply to the degree of devaluation handled the home after May 6, 1997. On January 1, 1998, Kelly bought a house and leased it to occupants for 2 years.

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On January 1, 2000, Kelly moves into the home and begins to use it as a principal residence. On February 1, 2002, after owning and utilizing the house as a principal home for more than two years, he offers the house at a $40,000 gain. Only $26,000 ($40,000 realized gain minus $14,000 depreciation) of the gain is eligible for the exemption.