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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.

Show previous replies

T

TaxGuyBill

Employee

The second period doesn't need to be "justified", it needs to be a situation "specified by the Secretary". In other words, there needs to be official guidance from the Department of Treasury or IRS saying that situation qualifies.

If your gain is large, it may be worthwhile going to a tax professional. When interviewing who to go to, you should specify that they may need to do research for situations that qualify as "Nonqualified Use", for purposes of the Section 121 Home Sale Exclusion.

Carl11_2

Employee

If you were AD/MIL during that time, there are exceptions that allow you to "suspend" the 5 year lookback, which can make the total lookback time up to 10 years (keeping the 2008/2009 "line in the sand" in mind). So if you are/were AD/MIL, select YES when asked if you lived in it as your primary residence and work it through. Read the small print, as it will matter.

J

jeffo45Author

All this for renting to the person who resided in the home before I bought it and occupied it for myself. Rental income was insignificant compared to the taxable income I would have to pay. If I decide to lease the home again and then live in it yet one more time I will never be able to shake the initial fact or the first rental before living in the home.

T

TaxGuyBill

Employee

Just to clarify: It is not the fact that it was rented first. ANYTIME that you move into a home after it was rented would create Nonqualified Use. So even if you had originally used it as your residence, then rented it out, then used it as your residence again, there would be Nonqualified Used and the exclusion would be prorated.

If you rent it out again and then move back into it, you will be adding more Nonqualified Use.

O

Opus 17Answer

Employee

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.

J

jeffo45Author

OK this is starting to make sense but seems a bit unfair. For myself the intention was my primary residence but ended up being split into multiple periods. The biggest downside of paying the capital gains tax is it requires the repayment of the ACA advance tax credits in my situation. Think the best option is to make the sale effective January of the next year. Thanks for all the good information! I can now make an informed decision.

S

Saxxon442

Ok so I live there from 2008 to 2018 and then we rented it out for 18 months so that we could get my dads old house back together after it being a rental!! Then the pandemic hit and we decided to sell!! It was our primary resident and then the 18 months and then we took ownership for 7 months while we sold it!! Can we take the exemption?