What condition must be met for capital gains to be subject to tax on real estate?

For capital gains from real estate to be subject to tax, one of the pivotal criteria involves the occupancy status of the property. The condition that states the property must not be owner-occupied for 2 of the last 5 years aligns with the concept that the owner is not utilizing the property as their primary residence. When a property is held for investment purposes or rented out and not used as a primary residence, the owner is subject to capital gains tax upon sale, as the primary residence exclusion does not apply.

This criterion is essential because the IRS allows homeowners to exclude a significant amount of capital gains from taxation if they have lived in the property as their principal residence for at least 2 out of the last 5 years. If the property was not owner-occupied for at least two of those years, it indicates that the seller may not qualify for that exclusion, thus making any capital gains fully taxable.

In contrast, the other conditions focus on occupancy in ways that do not directly affect capital gains tax liability under the current tax law.