@AmeliesUncle wrote:
As Mike said, two years.
However, because the home was not always your Principal Residence, the exclusion will be prorated based on the amount of time it was your Principal Residence compared to the total time of ownership.
This is a complicated issue called "non-qualified" periods of ownership. The idea is that you aren't allowed to convert a taxable vacation home into an excludable main home just by moving into it for the last two years.
Take the simple case where you bought the vacation home in 2010, make it your main home in 2023, and sell it in 2025. You owned the home for 15 years but only 2 years were qualified. That means you pay capital gains tax on 13/15ths of the gain, and 2/15ths of the gain (13%) is eligible for the exclusion. If you sell the home in 2030, then 7/20ths (35%) are eligible for the exclusion. The longer you live there as your main home, your excludable percentage keeps creeping up but never gets to 100%.
Now, due to a change in the law, periods of ownership before 2009 are "qualified" even if you did not live there. So if you bought the vacation home in 2000, make it your main home in 2023 and sell it in 2025, then:
2000-2008 is qualified
2009-2022 is non-qualified
2023-2025 is qualified.
So out of 25 years, 10 years is qualified and you can exclude 40% of the gain. The other 60% of the gain is taxable as a long term capital gain, and if the 40% of the gain is more than $500,000, that will also be taxable, of course. (You should be so fortunate as to have a $1.5million gain.)
