I sold a townhome this year that I lived in from 3/97 to 9/99. Since that time I have lived in a different state and starting in 2000 I used the townhome as a rental. I chose to sell it this past year to take advantage of the capital gains tax advantage (having lived there 2 of the last 5 years). Unfortunately, it did not sell as fast as I wanted and it did not close until 11/15/02. So, by the books there was a 2 month window 9/99 to 11/99 when I was actually in route to a new state and my place was empty and it was not really my "principal residence".

Since I filed my taxes for 1999 in CA, will the sale of my townhome in CO this year raise a red flag that I did not meet the living in the residence 2 out of the last 5 years capital gains exemption? I was kind of back and forth between CA and CO from 9/99 to 12/99 but mostly in CA.

Thanks for your feedback.