See IRS publication 523.
In general, you can exclude the first $250,000 of gain if you owned the home at least 2 years and lived in it as your main home for at least 2 of the 5 years prior to the sale. The 2 years do not have to be consecutive, so it really means, did you live in the home as your main home for at least 730 days of the 5 years ending on the date you sell.
Because you moved out and then moved back in, the 1 year that the condo was rented is considered non-qualified use. You also always have to pay recapture first, even if you qualify for the exclusion.
Lastly, you did not mention improvements; if you made permanent improvements, like a new roof, furnace, or flooring, that adds to your purchase price to create your adjusted cost basis. You can also increase your cost basis by certain closing costs at time of purchase and reduce your selling price by certain fees at time of sale.
Here is an example of how the calculation might work.
- I assume that you depreciated the property properly, using the purchase price, so you took or could have taken about $3,500 of depreciation, and you made no improvements.
- Your adjusted cost basis is 105000 minus 3500 depreciation = 101,500.
- Your selling price is 338000 minus 6% commission = 317720
- Capital gains 216,220.
- The first part of the capital gains that is due to depreciation ($3,500) is recaptured at regular income tax rates with a cap of 25% (so 10%, 12%, 22%, or 25%).
- The remaining $212,720 is used in the calculation of qualified use. If you owned the home for 15 years and had one year of non-qualified use, then 6.66% (1/15th) of your gain is not qualified. So $14,252 is taxed as a long term capital gain, at 0%, 15%, or 20%, depending on your other income. (Note that non-qualified use is actually figured to the month or the day).
- The remaining $198,468 of capital gains is eligible to be covered by your exclusion under the 2 year/5 year rule, and since that amount is less than $250,000, the entire $198,468 of capital gain is excluded from your income and not taxed.
Turbotax will do these calculations for you.
Assuming a single adult with income above $57,000, you will pay a total of $2907 capital gains and depreciation recapture tax, using the above numbers.
