No, that is a very outdated law. If you meet the qualifications, you can exclude up to a certain amount of money.
You can exclude $250,000 ($500,000 for married filing joint) on the sale of a house if:
If you have both lived in and owned the house for 2 of the past 5 years, you will have no tax effect if you file jointly and have less than $500,000 gain on the sale. There are some exceptions, like having reported a home office or used it as a rental.
Thanks for that info. Can you help with a more specific question. It’s actually my mom’s house. She is single. She has owned it for the last 10-15 years but has been using it as a rental for the last 3. And she will make more than 250000 on the sale. How will this change her tax liability?
Under the old home sale rules, the gain must have been reinvested into a new home to avoid capital gains tax. That is no longer the case.
If you have owned and used your home as your main home for two of the five years prior to the sale, you can exclude up to $250,000 of capital gain ($500,000 if filing jointly). No reinvestment of the gain is required. Any gain above those limits will be taxable.
Generally, you cannot take this exclusion if you have sold a home within the 2 years prior to the sale. There are exceptions to this rule, however.
See 'Does Your Home Sale Qualify for the Exclusion of Gain?' in this IRS publication for more information.
It changes things drastically. She will need to recapture the depreciation she claimed while renting it and there is no exclusion for business property. She will pay tax on the gain plus the depreciation. You can look at Form 4797 to see how this will play out.