I recently worked with a client who wants to sell a rental property (house). The client lived in the house until a few years ago. If they choose that house as a ‘Principle Residence’ and use the ‘Principle Residence Exemption’ for the years they lived in the house, the years they occupied the house has no capital gains payable when sold.
Now, the years when they used the house as a rental leads to rental income and also capital gains (if the house increased in value over the rental years). They thought it would be straightforward capital gains on the years that were used as a rental. It is not. There is a 1+ rule where an extra year of occupancy may be used to extend the Principle Residence Exemption for another year. Houses have increased in value recently, so this 1+ rule saves the owner tax.
Just another example of how Tax Accountants matter.