My wife and I sold our house in Virginia in April 2020, shortly after I retired in September 2019 from a long career working mostly overseas on official extended duty as a U.S. Foreign Service Officer (FSO). I want to know if I correctly understand 26 U.S.C., Section 121 laws that apply to our eligibility to exclude gain from the sale of a principal residence. Specifically, I want to confirm that the time our house was rented out while I was on official extended duty overseas can be considered as “qualified use” of our residence. This will allow us to consider most of our home ownership from 1997-2020 as “qualified use” so that we can make use of the majority of the $500,00 capital gains exclusion (for married couples filing jointly) on the sale of our principal residence.
We purchased our Virginia home in 1997 and used it as our principal residence for two years before renting it out in 1999. From 1999-2014, we mostly rented out the house during several overseas assignments, although we moved back into the house once from 7/4/2010-6/30/2011. I know from 26 U.S.C., Section 121 (b)(5)(C)(i) that the entire period prior to January 1, 2009 can be considered as “qualified use.”
From 1/1/2009-7/4/2010, I was assigned overseas on official extended duty, accompanied by my family. During this time, we rented out our Virginia house. From 7/4/2010-6/30/2011, we moved back into our Virginia house and used it as our principal residence. From 7/1/2011 to 7/3/2014, I was again on official extended duty overseas with my family, and we rented out our house. On 7/3/2014, we moved back into our house, using it again as our principal residence until selling it on 4/29/2020, shortly after I retired in September 2019.
I’m certain that we qualify to take the Section 121 exclusion of up to $500,000 of capital gains for married couples filing jointly, but I need to know:
(1) Whether the time we rented out our house from 1/1/2009-7/4/2010 and 7/1/2011-7/3/2014 can be considered as “qualified use” of our house. This would be my interpretation of 26 U.S.C., Section 121 (b)(5)(C)(ii)(II). By reducing the total time of “non-qualified use” of our house over the time we owned it from 1997-2020, we can benefit from the majority of the $500,000 exclusion.
(2) Or, does this rule only apply to one continuous stretch of time that can’t be interrupted by a time when the taxpayer is using the house as his principal residence, as we did from 7/4/2010-6/30/2011? In that case, would this mean only 7/1/2011-7/3/2014 would be “qualified use?”
For the applicable regulations, see, for example, https://www.law.cornell.edu/uscode/text/26/121. I know that regardless of the response to these questions, we’ll still need to pay tax on recaptured depreciation. Thanks for any advice anyone can provide.
