Question

Primary residence converted to rental property and then sold. Do I still qualify for the 250k/500k tax exemption?

Forum|Forum|6 years ago
June 4, 2019
2 replies
0 views

My husband and I bought a townhouse in 2013. We lived there 2013-2017. In June 2017 we bought a new house and rented this townhouse out. Since June 2017 the unit is a rental property.

If I sell the unit now, there will be a capital gain. Should the sale be considered as “main home” and thus qualify for the 500k capital gain tax exemption, or “rental property” without any tax exemption? IRS specifies the property has to be a “main home” with 2 year of primary residence out of 5 years in order to qualify for the exemption. But isn’t my unit a rental property? Is it correct to claim the sale as main home sale?

If the sale is considered “main home” sale, do we get 100% of the exemption (not just a percentage of it based on the number of days as primary residence)?

TurboTax Deluxe Online

C

Coleen3

Employee

It can be both. While it is a rental property in terms of having to recapture any depreciation you have taken, if you live there in the 2 out of 5 years as your primary residence as of the date of sale, you can still qualify for the exclusion.

M

michellefyuAuthor

Thanks for the response. In turbotax, do I report this sale as "Sale of Your Main Home", or check the "property is sold" box in the rental income section? This unit is a rental property while sold, and I do own and live in another home for 2 years.

In turbo tax:

Sale of Your Main Home
In this section we'll record the sale of your main home, your principal residence where you spend most of your time. This does not include the sale of a vacation home or a second home. You'll report that in the investments section.

The wording confuses me because the rental home is NOT my principal residence the year is it sold. Can I still report the sale in this section?

Carl11_2

Employee

If you report this sale in the Rental Property section of the program:

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in 2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even if it's zero. Then you MUST work through the "Sale of Property/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets. You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset. Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

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Morrisecat

I finally made enough turns to get to the correct screen where it asked me to verify we'd lived there. Turbotax partially excluded the gain, and I think I'm finally all set. Thank you!!

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geoffa

I am facing the same issue reported by Morrisecat. I recently sold a rental property that had previously been my primary residence. Since I had lived in the property for 2 of the last 5 years, I should qualify for the capital gains exclusion. When I work through the Sale of Property section under Business: Rental and Royalty, I'm eventually asked if I used the rental property as a personal residence. However, I'm not asked for the time that I lived in the property, and no exclusion is applied.

I'm using the Home & Business edition of TurboTax for MacOS. Any help would be greatly appreciated.