@angeliagblin wrote:
From pub 523 (2021) page 4
Eligibility Step 5—Exceptions to the Eligibility Test...
•You used the entire property as a vacation home or rental after 2008 or you used a portion of the home, separate from the living area, for business or rental purposes.
Do we qualify for the exclusion?
No, you do not.
The exception referred to results in some people owing more tax, not less. Suppose you moved out in 2016, used the property as a rental for 4 years, and then moved back in 2020 and sold in 2022. You would qualify for the exclusion because you lived in the home at least 2 of the 5 prior years, but you still have to pay capital gains tax for the portion of the gain that occurred during the 4 year rental period. The exclusion does not cover certain rental periods after 2008 even if you move back into the home for 2 years before selling.
That rule also means that even if you moved back into the home now and waited 2 more years to sell, you can only apply the exclusion to 20/26ths of your gain. (You owned for 26 years but only lived in the home as your main home for 20 of those years. The 6 year rental period from 2016-2022 is not qualified for the exclusion.)
As it stands now, you simply don't qualify at all.
