Q. My question is: since we own 2 homes right now, are we able to sell the rental home and be exempt from the capital gains tax since we lived in that home for 3/5 years?
A. Yes. Owning two homes does not disqualify you from the home sale exclusion. Be aware that although you can exclude most of the capital gain, you will have to pay tax (at long term capital gains rate) on the "depreciation recapture". Depreciation recapture is required on the depreciation you claimed or should have claimed.
If you claim the capital gain exclusion, on the rental house, you will be prevented from claiming an exclusion of the sale of another residence for two years,
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