Sale of home after multiple periods or rental and main residence

Forum|Forum|6 years ago
June 5, 2019
26 replies
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I have owned my home for five years. Initially I rented it then used as my residence for three different periods. The total number of days l lived in the home total more than 730 days. An example is 200 days as my residence followed by renting 365 days then my residence again for 200 days followed by another rental period of 300 days then my residence again for 365 days. The total is over two years as my residence during this five year period. I lived outside the USA during the time I rented the home. Would this be considered qualified use of the home for the capital gains exclusion? I owned no other home during this period

TurboTax Premier Windows

Best answer by Opus 17

Let me try and clarify.

The exclusion is for homeowners who use the home as their primary residence. As long as you live in the home at least two years, you can exclude up to $250,000 or $500,000 of the gain. You are also allowed to rent the home for up to 3 years after you move out before you sell. If you rent longer than 3 years, you are treated as a landlord and not allowed to exclude any gain.

The qualified use rule was set up to prevent landlords avoiding capital gains tax by moving back into their own rental property for 2 years before selling. So periods of ownership before it was your residence are non-qualified. Also, moving out then moving back in creates a non-qualified period. If you rented for 8 years and moved back in for 2 years, then only 20% of your gain is qualified. But all the times you lived in the home as your personal home are qualified, so someone who rented for 1year, then lived there 4 years, then rented for 1 year, then lived there 4 years, would be able to exclude 80% of their gain. Qualified period include times when you move out before selling as long as you don't move back, and as long as you still meet the 2 year/5 year rule. So if you rented for 1 year, lived there 4, rented for 1, lived there 3, rented for 1, and sold, you would still have 8 qualified years of the 10 total.

This is unfortunately not spelled out in the current version of IRS publication 523 on selling your home. Pub 523 from 10 years ago did a better job if you can find it online. TurboTax does include the calculation but you may need to manually supply the number of non-qualified days of ownership.

In your case, you must first meet the 2 years in the last 5 year rule to qualify for any exclusion (which you do). Then, to figure out how much gain you can exclude, you must add up all your qualified and non-qualified use for the entire length of your ownership. If you owned the home for 1915 days and it was your residence for 732 days then you can exclude 38.2% of your gain (up to $250,000 or $500,000) and you will owe capital gains tax on 61.8% of your gain. The gain due to depreciation will be taxed at a flat 25% and the rest will be taxed at 15% (for most taxpayers).

If you were to live in the house for one more year, you could exclude 1097/2271 or 48% of your gain. Your qualified percent would increase the longer you lived there as your personal residence.

It's not just the first rental that creates the qualified/non-qualified use issue. Any period of rental that ends with you moving back is non-qualified, because it makes you look like a landlord/property investor. The only rental use that qualifies you for the exclusion is when you move out of your personal home and sell it within 3 years, because that makes you look like a homeowner who used a short rental period to manage their move better.

Carl11_2

Employee

It's qualified use. TO qualify for the capital gains tax exclusion the property must have been your primary residence for at least 24 months of the last 60 months you owned it, counting backwards from the closing date on the HUD-1 statement you will receive at the closing when you sell it. The 24 months do not have to be consecutive. but they must all have been within the last 60 months you owned it.

jeffo45Author

OK thanks. I did go back and look at the depreciation which I then added up and entered on Turbotax and it then gives me the exclusion minus the depreciation. I haven't been able to get an answer from the IRS on this as they don't take these questions during this time period. I have never had a tax person or CPA so ya...Thanks a lot!!!

Carl11_2

Employee

Remember, for the depreciation recapture to include 2016 too. You have to add together prior year's and current year depr to get the correct figure there.

TaxGuyBill

Employee

Because you used it as your residence AFTER it was rented, the exclusion is prorated.  It is best explained by a simplified example.

Let's say you bought the house for $100,000, sold it for $150,000, and took $10,000 of depreciation.  Let's also say it was your Principal Residence for exactly 60% of time (the actual calculation uses days), and it was your residence when it was sold.

In that scenario, the $10,000 of depreciation can not be excluded.  For the other $50,000 of gain, you can exclude 60% of it.  So you can exclude $30,000, but you will pay tax on the other $20,000 (plus the $10,000 of depreciation).

Carl11_2

Employee

It does matter who was the last to move out prior to the date of sale... the owner or the tenant.

jeffo45Author

The 60% being the time I actually lived in the house? I am actually going to make it 732 days of my total occupancy and a total of five years and three months of owning. It will be my residence when I sell. A bit confused and this may change my decision on what to do with the home. I lived overseas during this time and not in the military or special assignment.

Carl11_2

Employee

The percentages do not matter and are totally irrelevant. If you lived in the house as your primary residence for at leat 731 days of the last 1826 days you owned it, counting backwards from the closing date on the HUD-1 statement you will receive at the closing when you sell it, then you qualify for the capital gains tax exclusion. Those 731 days do not have to be consecutive either, so long as all of them are in the last 1826 days you owned it. One day short, and you don't qualify.

TaxGuyBill

Employee

@Carl He has "Nonqualified Use", so he can only exclude PART of the gain.

@jeffo45 If it was your Principal Residence for 732 days out of 1915 days of ownership (about 5 years, 3 months), not counting the gain from the depreciation, only 38.2% (732 divided by 1915) of the Gain can be excluded. So the other 61.8% of the Gain is taxable, plus the depreciation.

SweetieJean

Employee

732 divided by 1915 is 38.2%

TaxGuyBill

Employee

Thanks @SweetieJean , I accidentally typed 762 into my equation, rather than 732. I'll correct my comment above.