Sec 121b5 exclusion loophole

[Carlos Ptriawan]

I'm surprised after reading this article:
https://www.accountingweb.com/...

Basically, if you have rental (or primary -> rental) and turn to primary, and then sell the property after live there for two years, the non-qualified use ratio doesn't really matter (in other words it's tax-free) as long as :
- when you sell, you live in the property for 2 years or more AND
- if you married and the profit of the sale is less than $500k.

Is my understanding correct?

[Dave Foster]

@Carlos Ptriawan, No that is not true.  @Tanner Sherman, is absolutely correct if you buy a primary residence and live in it.  Or if you buy a primary residence and live in it for two years and then convert it to an investment property for the next 3 years max.  

But If you convert an investment property to your primary residence and then sell after you have lived in it for 2 out of the 5 years prior to sale then you will need to prorate the gain between periods of qualified use (as your primary residence) and non-qualified use (as investment).  You will only be eligiblle for the prorated gain attributed to the primary use.  And the author also forgot that you have to recapture all depreciation on the property sale.

Is it an opportunity to still capture some gain tax free? - absolutely.  A loophole that doesn't cost you anything to take advantage of?  - Not so much