You have a situation called nonqualified use. You may exclude up to $250,000 of the capital gains on your personal residence, but you cannot exclude gain that is subject to the period of nonqualified use. You will also have to pay depreciation recapture for the depreciation that you took or could’ve taken while the house was a rental. This situation is covered in one of the worksheets in publication 523 although it is not clearly spelled out in the instructions unfortunately.
let’s consider some imaginary numbers. I suppose you purchased a home for $100,000, you claimed $10,000 of depreciation for the six years that it was a rental, and you are selling for $300,000. In that case, your overall capital gains is $210,000.
The first $10,000 of capital gains is taxed as depreciation recapture. That’s taxed at your regular income tax rate with a cap of 25%.
Out of the remaining $200,000 of capital gains, 6/32 or 19% is due to the period of nonqualified use, and so $38,000 will be taxed as long-term capital gains, usually at a rate of 15%. The remainder is less than the $250,000 exclusion, so it would be tax-free. That amounts to around $8500 of tax owed, just doing the math in my head.
turboTax can do the calculation for you, or you can try using the worksheet in publication 523.
