Not all of the gain is excludable, even if it's less than $250,000. There's a recapture of the depreciation allowed or allowable during the rental period.

Good point.

And now that I'm thinking straight (I could blame that on finally being awake after that refreshing 4 hour nap last night), one might be tempted to consider that the rental is non-qualified use for the rental period after 12/31/08. And non-qualified use causes you to pay tax on some of your gain even when you meet the other requirements to exclude gain under IRC 121.

However tempting that might be, don't do it. Rental periods AFTER using the house as your principal residence don't fall into this new definition of non-qualified use.

So there is no non-qualified use in this case.

--Peter <== who is thinking there are way too many double negatives when you have to talk about non-qualified use.