non-qualified use before 5-year period (principal residence gain exclusion)

I believe it is botched. It should have said "after" instead of "before" in "and before the time".

Maria U. Ku, CPA Oakland, CA

That doesn't seem right either. I think Pub. 523 Worksheet 3 Section B should say:

"Complete this section only if there is a period, after the year 2008, when neither you nor your spouse (or your former spouse) used the property as a main home, and that period of non-use occurred before the last time that you or your spouse (or your former spouse) used the property as a main home. Otherwise, skip to Section C."

Furthermore, Step 2 of the worksheet should be modified to explain that (even if Section B cannot be skipped) "non-use days" does not include days after the last day of principal residence use.

For example, if the taxpayer owns a rental property for 4 years, then makes it their main home for 3 years, then rents it out again for 2 years before selling it, only the first (4 year) period is non-qualified use for § 121.

I think there is no need for the worksheet to refer to the 5-year period at all. Admittedly, the statute's exclusion FROM non-qualified use is of days which are

- within the 5-year period AND

- after the last day of principal residence use.

But if the latter is outside of the 5-year period, the taxpayer is disqualified from gain exclusion by the eligibility test (Pub 523 p. 3) and does not bother with Worksheet 3.

The worksheet as published (confining non-qualified use TO the 5-year period) is wrong regardless.

I have seen some online *official* IRS changes to those instructions, which *might* be their "fix" for the (obvious?) problem. Or might not be...