I want to buy a "temporary house" while I develop (maybe build) more
of a "dream house" on some land (that I haven't bought yet). If I buy
a temporary house is the shortest time I need to own it two years
(this is what i heard) to prevent negative impact of capital gains?
Surely people own properties for less than two years in these
circumstances, how do they handle it (or do they just take the tax
hit?). My accountant would kill me.

Hello and thank you for your question.

Yes, you must own and occupy a property as your principal residence to
qualify to exclude capital gain on the sale.

The IRS explanation is pretty clear about how the exclusion works:
Sale of Residence - Real Estate Tax Tips
http://www.irs.gov/businesses/small/industries/article/0,,id=98921,00.html

For the complete explanation, see IRS Publication 523
http://www.irs.gov/pub/irs-pdf/p523.pdf

Search terms used:
residence tax exclusion years

Thanks again for bringing us your question.

Sincerely,
Richard-ga

---

Clarification of Answer by richard-ga on 18 May 2004 15:03 PDT

Somehow I omitted the clause "for two years" from the first sentence of my answer.

"Yes, you must own and occupy a property for two years as your
principal residence to exclude capital gain on the sale."

Sorry for the confusion

-R