Assume that Paul and Karen are getting divorced in December 2008. They own several rental properties. Karen is to keep one of them and she decides to move into rental.
It used to be that if Karen wanted to sell the house after 2 years, she could apply her full $250,000 exclusion against the gain. But now the IRS wants part of those capital gains taxes that were accrued during the time it was rental property, starting January 1, 2009.
Scenario #1: Karen moves into the rental in December, 2008. She sells this property in March 2011. There is a $240,000 capital gain which she is able to wipe out with her $250,000 exclusion because the house was not a rental as of January 1, 2009.
Scenario #2: Karen does not move into the rental but continues to keep the
property rented out as she wants the rental income. Four years later in 2013,
she moves into the rental. Two years later in 2015, she sells this property.
There is a $240,000 capital gain. She is only able to able to wipe out 2/6 ($80,000)
of the capital gain with her exclusion. She will have to pay taxes on the remaining
$160,000. And she will also have to pay tax on depreciation recapture.