Capital Gains-Contract Sale

[auntdiane58]

What is the name of your state? IL
My husband and I have lived in a house for 20+ years. It is a beautiful 4 bedroom ranch located right across the street from the Chain-O-Lakes area in Lake Villa, IL. It is well kept and maintained on sewer and well, with a fireplace and 2,000 sq. ft. We own and remodeled a rental house (right next door to our home). We moved into the newly re-built house in Dec. 05. We are now trying to sell our old home. We plan to live in the new house for 2 yrs. We have an offer to buy our old home, but the buyers are trying to sell their home in Michigan and aren't having much luck. They would like to "rent with the option to buy" our old home for 1 year and purchase it in 1 year, with a portion of the rent going toward the purchase price ($250,000). If we agree to this agreement (Contract Sale?). Do we still get the same tax break- i.e. Capital Gains-Principal Residence if we haven't lived there in the past year? Please respond asap, as we are meeting with the new buyers soon, and I would like to put a "For Sale" sign on the old house before winter hits our area if we do not get the tax break, as that would make or break this deal. Thank you!

[tranquility]

Although you aren't clear exactly, I'd say yes. Section 121 requires you to have lived in (as primary residence) and owned the property for 2 of the last 5 years. If the house you are selling was lived in by you as your primary residence, the exclusion would apply.

[auntdiane58]

Thanks for your reply (sorry my question wasn't that clear). OK, so even though we had lived in the principal residence for 20+ yrs. and then rent to new buyers with option to purchase (Contract Sale) for one or two yrs. (we are not living there). We still can get the principal residence tax break because we had lived there 2 of the past 5 years? Thanks in advance.

[earlofcrankcase]

The two out of five year rule applies in Texas also. It has been suggested to me that I can use this law by changing my mailing address every two years to homestead two properties. The capital gains tax break on a primary residence has a one time usage though.

Are you are close to the 65 or over property tax cap?
Are you looking for an income after retierment?
Being that the capital gains tax break is a one time event. You should be useing it to it's fullest legal potential.
I am not an attorney. I have not verified this.
I have varified that the stock market is BS.

[tranquility]

Section 121 (aka "two out of five year rule") is a federal law. States usually conform, but are not required to. The exclusion can be taken every two years. (Under the proper circumstances.) It has nothing to do with homestead or property taxes which are state-law related.

As to the OP's second question, if you owned and used the home as your personal residence for 2 of the last 5 years the exemption applies.