Ablang wrote:

I think a homeowner may have to wait longer than 2 years
before selling a home, considering all the costs that go into selling
a home, and then getting a new loan on the next, more expensive home.

I would agree--you have to consider the transaction costs in any
"plan" to try and use the gain exclusion--you shouldn't let the tax
tail wag the economic dog. As well, it needs to *really* be your
principal residence for that two year period--we've already had one
case where a taxpayer lost on that issue both because he couldn't
meet the mechanical date quasi-safe harbor in the regulations and
his other actions were inconsistent with the claim that the
residence in question was his principal residence (Guinan v. United
States, 91 AFTR 2d 2003-2174).

Finally, it's important to consider that we appear to be in an
"unusual" housing market in many parts of the country, with a
current rush to buy driven by fears that rates are going up. My
totally uneducated guess is that this may mean that what we see
right now is simply a rush by anyone who has plans to buy in the
next year or so trying to get in now. There's a real question in my
mind about what happens once that group gets their homes, especially
if rates do continue to increase.

That is, the question is what will the supply of buyers be in two
years when you go to execute your "sell the property" side of the
equation? I have been around long enough to see slow real estate
markets and people who have sold at losses--sometimes
substantial--in locations where "everyone knew" that values would
just continue to grow when the houses were initially purchased.

--
Ed Zollars, CPA
Phoenix, Arizona