Question

A taxpayer who otherwise meets the ownership and use tests may not be allowed to exclude all of her realized gain if the taxpayer has nonqualified use of the home before selling?

Answer 1

A taxpayer who has had nonqualified use of a home may have a reduced capital gains exclusion upon sale, as nonqualified use includes times when the home was not the taxpayer's primary residence.

Step-by-step explanation:

A taxpayer who meets the ownership and use tests under U.S. tax law is normally allowed to exclude a certain amount of capital gain realized from the sale of a personal residence.

However, if there has been nonqualified use of the home before the sale — which primarily refers to periods where the home was not used as the taxpayer's primary residence — this may result in a reduced exclusion amount.

Nonqualified use includes renting out the property, using it as a vacation home, or holding it for investment purposes.

It's important to note that the rules regarding nonqualified use and the potential impact on capital gains exclusion are subject to change and can be complex, so consultation with tax professionals or reliance on current IRS guidelines is recommended.