No Gain Exemption on a Rebuilt Home

Gain from the sale of a primary home is tax exempt up the $250k/$500k (singles/married) limit but not if the house is rebuilt and sold. The tax court ruled that in this case (Gates, Tax Court No 1) the owners did not live in their rebuilt house 2 years out of  the 5 years prior to the sale as is required in order to take the exemption. The owners had lived in their house for several years. They rebuilt the house and sold it for a gain. The court said the gain is  taxable since they did not meet the 2/5 year requirement.