To qualify for the Capital gains exclusion you must have lived in the house as your primary residence for at least 2 years of the last 5 years you owned it, counting backwards from the sale date on the HUD-1 closing statement you will receive at the closing when you sell it.
If jointly owned and you're filing a joint return, you can exclude up to $500,000 from capital gains taxation.
If singly owned, then you can exclude up to $250,000 from capital gains taxation.
The TurboTax program can handle and deal with this just fine. But how you report the sale in the program depends on what it was at the time you sold it. If it was a rental at the time you sold it (The last person to move out before the sale was a renter) then you report the sale on SCH E. If it was your primary residence at the time of the sale, then it gets a bit tricky. You report the disposition on SCH E (which I assume you did already, the year you converted it to your primary residence), but you report the sale in the Sale of Home (Gain or Loss) section of the program.
In either case, the program will ask you questions to determine if you qualify for the capital gains tax exclusion, or not.
One important thing to note, is that you will need the IRS Form 4562 titled "Depreciation and Amortization Report" from the last year you rented it out. You'll need it to figure the total depreciation you took on the property while it was a rental. That's because when you sell the property you must recapture all prior deprecation. Furthermore, that recaptured deprecation is taxed and is NOT excluded from taxation if your qualify for the capital gains tax exclusion. Basically, you will pay taxes on the recaptured depreciation no matter what.
