Deductions & credits
The partial exclusion from gain depends in large part on your motivation in selling your old home. The IRS has stated the following with regard to partial exclusions:
"...you may still qualify for a partial exclusion of gain. You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event."
Below is the chart you would use to determine what, if any, partial exclusion you would be eligible to receive. At the end of the chart there is a reference to a taxable gain in connection with rental use. Gain from the sale or exchange of your main home isn’t excludable from income if it is allocable to periods of non-qualified use. Non-qualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as your main home.
You did have a period of non-qualified use in that you and your spouse were living in NJ at a time when your CT home was not your main home. While there are some exceptions to non-qualified use, those exceptions do not seem to apply here. Thus, to the extent the gain you realized from the sale of your old home was attributable to the period of time when you were renting the property, then such gain would not be excluded from income.
Below is a link to an IRS webpage that addresses the sale of a home and partial exclusion of gain, among other things, that you might find helpful.
