Mortgage Forgiveness Debt Relief Act. Read the bill here: http://www.govtrack.us... Section 2, part 5: (5) PRINCIPAL RESIDENCE- For purposes of this subsection, the term `principal residence’ has the same meaning as when used in section 121.’. Section 121 of the IRS code http://www.law.cornell... deals with capital gains tax exclusion on principal residence if a person lives in the home for the past 2 (aggregated) of 5 years. As clearly outlined by the Mortgage Forgiveness Debt Relief Act, the IRS defines principal residence according to Section 121 of the IRS code, which states that it had to have been the person's principal residence for 2 of the past 5 years before the date of the sale (or foreclosure with regards to the Mortgage Debt Relief). As a clarification, the IRS modified Section 121 in 2008 so that if you had purchased a property as a non-qualified principal residence use (rental property, vacation home, second home), and then converted it to a qualified principal residence by moving back in, you do NOT get to claim the full capital gains exclusion. You can only claim the portion of the time it was a qualified principal residence versus non-qualified principal use. On the flip side, if you had purchased a home as a qualified principal residence, and then converted it to a non-qualified principal residence use, as long as you qualify for the aggregated 2 of 5 year condition, you can still exclude the full capital gains exclusion.
So am I interpreting the relief act and what constitutes a principle residence correctly? If I had bought a condo and lived in it for a little over 2 years, moved away because of a job, and rented it out for less than 3 years, and then it was foreclosed on, can I still claim it using form 982 under the Mortgage Debt Relief Act as a principal residence, even if I was living in another home at that time? Again, the bill clearly defines principal residence as having the same meaning as in Section 121 of the IRS code. Though Section 121 doesn't clearly spell it out, the code implies that principal residence qualifies for capital gains exclusion if lived in for 2 of 5 years from date of sale.
Section 121 of the IRS code specifically states you can't claim 2 homes as principle residences for capital gains purposes unless one claim occurs 2 years after a previous principal residence sale claim.