Home Sale Tax exclusions

Modified Home Sale Exclusion for Non-Qualifying Use
By William Perez, About.com

When homeowners sell their main home, they can exclude up to $500,000 in capital gains from income tax. The Housing Assistance Tax Act of 2008 changes the rules. The amount of profits from the sale of a house that can be excluded is now based on the percentage of time when the house was used as a primary residence.
Homeowners who sell their primary residence can exclude up to $250,000 (or up to $500,000 for married couples filing jointly) in capital gains from their taxes. The amount of gain that will qualify for the exclusion is limited based on the amount of time that the house is used as a primary residence. If the house is used other than as a primary residence, capital gains must be allocated between qualifying and non-qualifying use. Any non-qualifying use can potentially reduce the amount of capital gain that can be excluded. The allocation rules take effect beginning January 1, 2009.
Qualifying Use vs. Non-Qualifying UseTaxpayers can qualify to exclude up to $250,000 in capital gains ($500,000 if married and filing jointly) when selling a house. To qualify, the person needs to own and live in the property has his or her primary residence for at least two years out of the five years ending on the date of sale.
Sometimes, however, the property isn't used as a primary residence during the entire five-year period. The house might be rented out, used as a vacation home, or used as a second home. Such uses of the home will be considered non-qualifying use and could subject gains from the sale of the house to tax.
Qualifying use means the property is being used by the homeowner or the homeowner's spouse as a primary residence. Non-qualifying use means the property is not being used as a primary residence by either the homeowner or the homeowner's spouse...

Temporary absences not exceeding a total of two years in aggregate will not jeopardize qualifying use. A property can maintain its status as a primary residence even if the homeowner is absence due to change in employment, health conditions, or other unforeseen circumstances.
Sources:
Section 3092 of Housing Assistance Tax Act of 2008 (H.R. 3221)
Summary of the tax provisions in H.R. 3221 from the Ways and Means Committee [pdf]
CCH Tax Briefing on the Housing Assistance Tax Act [pdf]
More Tax Planning: U.S. Quick Tips
source: http://www.about.com/, February 7, 2009