The Taxpayer Relief Act of 1997 (the "Act"), provided for the exclusion of up to $500,000.00 of gain on the sale or exchange of a principal residence. The Act provided for the exclusion of $500,000.00 for married persons filing a joint return and an exclusion of $250,000.00 for all other taxpayers.

To be eligible for the exclusion, the taxpayer must have owned and occupied the property as a principal residence for at least two year of the five years preceding the sale. The Act did not provide a mechanism for calculating the amount of the exclusion if a taxpayer owned the home for less than the two-year requirement.

The new tax reform law signed by President Clinton provides that taxpayers who owned a property for less than two years may exclude a portion or the entire gain on the property. The law provides that the taxpayer must calculate the amount of the exclusion based upon the percentage of the two year period the taxpayer owns the property. For example:

Married taxpayers purchased a principal residence in June of 1998 for $200,000.00. In June of 1999, the taxpayer sells the property for $300,000.00. The excludable amount is derived by calculating the percentage of the two-year requirement that the taxpayers owned the property. In this case, the taxpayers owned the property for one of the two-year requirements, or 50%. This percentage is multiplied by the maximum amount of the exclusion ($500,000.00), to arrive at an excludable amount of $250,000.00. Since the taxpayers only realized a $100,000.00 gain, the entire amount is excludable.