@nuges01 wrote:
I have a scenario I'd like to get some clarity on if you'd permit:
My wife and I bought a house in CT on June 7, 2019 for $160k, then in August 2020 we had to move to NJ for new jobs. We figured it was too early to sell after 1 year, so we rented it out instead. We rented it out from August 1, 2020 to July 23, 2021 - which was the day it was sold. We lived in it for a total of just under 14 months, and rented it out for just under 12. (Sale price was $180k if relevant).
After renting it out - in 2020 - we purchased another house in NJ. We sold the CT house in 2021 because of the provision that allows us to move more than 50 miles without incurring capital gains taxes. I am worried though that because we bought another home that we lived in concurrent to renting out the CT home, the CT home would be considered a rental business (or at least not a main home) and would be subject to capital gains. Can anybody shed some light on this for me please?
Thanks
Review publication 523.
https://www.irs.gov/pub/irs-pdf/p523.pdf
If you moved due to a job change of more than 50 miles, you do qualify for a partial capital gains exclusion. The exclusion is based on the shorted of three time periods; how long you owned the home, how long you used it as your main home, and how long since the last time you used the exclusion. In your case, if it was your main home for 14 months, you would qualify to exclude $145,000, or $290,000 if married filing jointly (14/24 of the usual amount).
However, as this is also a rental, you have to deal with that fact. Your 2020 return should have reported the rental income on schedule E, and you deducted depreciation and other rental expenses. You have to report your 2021 rental expenses on schedule E as well, and you can initiate the home sale from inside the rental interview. You will have to pay depreciation recapture on the depreciation you took or could have taken, then the next $145,000 or $290,000 of gain will be covered by the exclusion.
