More importantly, we have to look to the good faith of the taxpayer. Real estate has been strong these past two years, and few homeowners found themselves in the situation where they had to rent their house because buyers were not available. Regardless of whether you have to rent your house, however, keep in mind that to take advantage of the new tax saving laws, there are statutory time limits that have to be honored. Neither the IRS nor the courts have the authority to extend this time. If you are married, so long as either spouse meets this requirement, the exclusion of gain applies.
Marital status is determined on the date the house is sold.
In the event of a divorce where one spouse is given ownership pursuant to a divorce decree or separation agreement, the use requirement will include any time that the former spouse actually owned the property before the transfer to the other spouse. The IRS has issued proposed regulations attempting to clarify the 1997 law. The IRS then makes it clear that the ownership and use requirements do not have to be continuous. Keep in mind that you can only exchange investment properties, not principal residences. The answer is that the exclusion will not apply unless the property is in fact your principal residence.