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Home Sale Rules Liberalized.

The IRS has issued new regulations liberalizing key aspects of the home sale exclusion. This exclusion allows an individual to treat as tax-free up to $250,000 of gain from the sale of a home owned and used by him as a principal residence (his main home) for at least 2 of the 5 years before the sale. The full exclusion doesn't apply if, within the 2 year period ending on the sale date, there was another home sale by the taxpayer to which the exclusion applied. Married individuals filing jointly for the year of sale may exclude up to $500,000 of home sale gain if they meet a number of conditions.

The new regulations liberalizes an important rule:

...The IRS originally took the position that if a principal residence consistently was used in part for residential purposes and in part for business purposes, only the gain allocable to the residential portion could be excluded. The new IRS regulations adopt a more liberal rule. They provide that all of the gain from the home sale (except for gain resulting from certain depreciation deductions) is eligible for the exclusion if both the residential and non-residential portions of the home are within the same dwelling unit (e.g., one room in the home is used as the office of a sideline business). However, gain is allocated if the non-residence portion of the home is separate from the dwelling unit (e.g., an office in a converted garage).

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