1. Individuals are generally permitted to exclude from income up to $250,000 ($500,000, in general, for married couples filing a joint return) realized on the sale or exchange of their principal residence.

Q2. May I use this exclusion more than once?

1. Yes, but generally not more than once every two years. In order to qualify, you must have owned and used the property as your principal residence for at least two years during the five-year period ending on the date of the sale or exchange. In addition, the two year periods do not have to be continuous.

Q3. May I use this new exclusion in connection with Internal Revenue Code

("IRC") section 1034 "rollover" of gain on the sale of my principal residence if I purchase a home of equal or greater value?

1. No. The IRC section 1034 provision allowing a delay in the recognition of gain when purchasing a replacement residence of equal or greater value has been repealed. Except for a very limited window period (as discussed in Question 10 below), the only exclusion is the $250,000 exclusion ($500,000 for married couples filing jointly).

Q4. May I still take a one-time IRC section 121 exclusion of $125,000 of gain from the sale of my principal residence if I am age 55 years or older?

1. No. Again, except for a very limited time (as discussed in Question 10 below), this exclusion has been repealed and the only exclusion available is the $250,000 exclusion ($500,000 for married couples filing jointly).

Q5. If I have previously used the IRC section 121 $125,000 exclusion of gain, am I prohibited from using the new $250,000 ($500,000 for married couples filing jointly) exclusion of gain?

1. Generally no. Even if you have previously taken the one-time $125,000 exclusion, if you are otherwise eligible for the exclusion you can take advantage of the $250,000 exclusion ($500,000 for married couples filing jointly) as often as you meet the requirements.

Q6. What if I move before I have occupied my residence for two years or before two years have elapsed since the last time I sold or exchanged any principal residence?

1. If you fail to meet either two-year requirement, you will still be entitled to a pro rata amount of the exclusion as long as the failure to meet the requirement is because of a change in place of employment, health or other unforeseen circumstances.  The IRS Restructuring and Reform Act of 1998 provides that this ratio is that portion of the $250,000/$500,000 exclusion equal to the fraction of the two years that the ownership and use requirement is met. Therefore, an unmarried taxpayer who owns and uses a principal residence for one year and then sells because of a job transfer may exclude up to $125,000 of gain (one-half of the regular $250,000 exclusion).   Example: Ms. Seller purchased and occupied her principal residence in 1998. One year later, she is transferred by her employer to another city and sells her house for a $100,000 gain. Because she occupied her residence for one-half of the required two years, Ms. Seller is entitled to exclude up to one-half of the $250,000 otherwise allowed, thereby covering her entire $100,000 gain. This a change from the IRS´s previous position which would only have allowed her to exclude one-half of her gain, or $50,000.

Q7 How does the exclusion apply to married couples?

1. The $500,000 exclusion applies to married couples filing jointly when all of the following conditions are met:

• Either spouse meets the ownership requirement;
• Both spouses meet the use requirement; and
• Neither spouse has had a sale of their principal residence in the preceding two years subject to the exclusion.

Q8. What if I marry someone who has used the exclusion within two years prior to our marriage?

1. Even though your spouse has used the exclusion within two years prior to your marriage, you would still be allowed a $250,000 exclusion. Once both spouses satisfy the eligibility requirements and two years have passed since the last exclusion was allowed to either spouse, a full $500,000 exclusion would be allowed for the next sale or exchange of a principal residence.

Q9. When do these new rules take effect?

1. The new exclusion rules take effect for sales or exchanges after May 6, 1997.

Q10. Are there any special rules for sales or exchanges occurring after May 6, 1997 and before August 5, 1997?

1. Yes. Although the new exclusion is effective for sales or exchanges after May 6, 1997, you may elect to be subject to the old rules, that is, IRC section 1034 "rollover" of gain and IRC section 121 $125,000 one-time exclusion provisions, if:

• The sale or exchange occurred prior to August 5, 1997; or
• The sale or exchange occurs after August 5, 1997, but is pursuant to a binding contract in effect on that date; or
• No gain on the sale would be recognized, under the prior "rollover" rules, because a replacement residence of equal or greater value was acquired on or before August 5, 1997 (or pursuant to a binding contract in effect on that date).

Note: It may be to your advantage to elect to proceed under the old law´s rollover rules if you (1) have gain on the sale of your principal residence in excess of the $250,000/$500,000 limits, (2) meet one of the above-referenced tests, and (3) are replacing your old residence with a new one so long as the cost of the new residence is more than the allowable exclusion under the new law.

Example: Mr. & Mrs. Seller sold their home for $4 million after May 6, 1997, but before August 5, 1997. They purchased their house for $500,000 30 years ago. Under the new law the Sellers would be taxed on a $3 million gain (i.e. $4 million sales price less $500,000 basis and $500,000 exclusion for married couples filing jointly). If the Sellers replaced their residence with a new one costing more than $1 million (basis plus exclusion) they would be better off opting to be taxed under the old law´s rules.

Q11. May I deduct a loss on the sale of my principal residence?