Nonqualified Use and the Home Sale Exclusion

The home sale exclusion applies only to “qualified use” of a residence. “Nonqualified use” includes any period after December 31, 2008, in which the home is not used as a principal residence. Thus, if you stop using the home as your main home and use it only as vacation property, or if you rent it out, gain related to this period does not qualify for the home sale exclusion. Temporary absences are not treated as nonqualified use; they’re disregarded.

If you have been claiming a home office deduction for a portion of your home, you must recapture depreciation you have claimed for the office after May 6, 1997. This is so even though you can use the exclusion for gain on this part of the home. Recapture means you pay tax on all the depreciation claimed after May 6, 1997, at the rate of 25% (assuming your tax bracket is at or above this rate).