Before this new law, which takes effect on January 1, 2009, the savvy taxpayer could convert his old rental or vacation home into a principal residence, live in it for two years, and then sell it to take advantage of the $250,000 and $500,000 exclusion of gain rules.

Example of Old Law

In 1995, Jim Johnson bought a vacation home for $50,000. In 2006, when the vacation home was worth $200,000, he moved into this vacation home and made it his principal home for two years and five days. In 2008, ... Log in to view full article.