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WHEN YOU SELL YOUR primary residence, you can’t claim a tax loss if you receive less than you paid. But you can avoid capital gains taxes on $250,000 of appreciation, or $500,000 if you’re married filing jointly. To qualify for the $250,000 or $500,000 exclusion, you need to have lived in the house for at least 24 months during the prior five years.
What if your capital gain is more than these sums? You can add certain items to your home’s cost basis, such as some of your closing costs and the amount spent on home improvements. That will trim your taxable gain.
Things are trickier if you sell a second home. In the past, you were able to move into a vacation property, live there for two years and get the full benefit of the $250,000 or $500,000 exclusion. That ploy no longer works. For instance, if you owned the place for five years but used it as your principal residence for just the final two years, only 40% of any gain is eligible for the exclusion—and you would owe capital gains taxes on the other 60%.
The new rules apply to 2009 onward. What if you owned a second home prior to 2009? You get some tax relief. To figure out what percentage of your gain isn’t eligible for the exclusion, you take the amount of time the property wasn’t your primary residence in the period since 2009 and divide it by the total number of years you owned the property—including the years prior to 2009.
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Does it have to be continuous 24 months for the last 5 years or can it be say 5 months a year for 5 years?
As I understand it, the 24 months don’t have to be continuous.