I thought you had to OWN the property for 5 years in the case of converting back to rental use. Can you point to the IRS guidance that says you have to OCCUPY it as a personal residence for 5 years. I read Pub 523 for Tax year 2006 and didn’t see the 5-year personal use for the case of converting rental back to residence addressed.

Sorry… checked my notes… the 5 yr holding period only applies if the property was originally acquired through a 1031 exchange… My Bad!

This closed the loophole of 1031’ing a couple of crappy rental houses into a McMansion, moving in for 2 years and taking $500K off the top tax free.

FYI… to Summarize for anyone interested

President Bush signed H.R. 4520 into law on October 22, 2004.

New Holding Period Created

The provisions contained within H.R. 4520 created a five (5) year holding requirement for an Investor (Taxpayer) who wants to exclude capital gains from his taxable income pursuant to a 121 tax-free exclusion from the disposition (sale) of his primary residence that was originally acquired as rental or investment property as part of a prior tax-deferred exchange transaction.