@sk4000sk2 wrote:
Many thanks again. Just want to clarify - Home A was only rented from Dec 16 to Oct 19 so it is rented less than 3 years. Since Oct 19 it is not used by anyone other than me and my family. I even paid all utilities on the home.
Secondly, you mentioned, quote "Even if you had qualified to exclude the gain on both homes, you can only use the exclusion once every two years. And even if you did qualify to exclude the gain on home A, you must still deal with the depreciation and pay depreciation recapture." I have never used this exclusion on taxes so how do I use it? I do not mind paying taxes only on depreciation recapture.
To use the exclusion, you must have lived in the home at least 2 years of the past 5 years, it doesn't matter if it was rented or vacant or under renovation. I may not have been precise enough in my wording. Since home A was sold in Feb 2021, you would have to have lived in it as your main home for at least 731 days since Feb 2016. The days do not have to be consecutive, but it must have been your main home.
Since you only qualify to use the exclusion on home B, this is what will happen on your 2021 tax return:
If you don't get a 1099-S at the closing, and your gain is less than $500,000, then you don't even have to report it on your tax return. If you do get a 1099-S at the closing, you must report it. Use the section for "sale of my main home" in the Income area for sales of assets and other property. Turbotax will ask some questions about the purchase price, improvements, selling price and your qualifications for the exclusion, and as long as the gain is less than $500,000, you won't pay tax even though the sale will be reported.
For home A, you will list that as the sale of a rental home. You will need to provide information about the purchase price, cost of improvements (not repairs), and depreciation you claimed or could have claimed. You will pay recapture tax on the part of the gain due to depreciation (regular tax rates up to a maximum of 25%) and you will pay long term capital gains tax (usually 15%) on any additional gain.
If you did actually live in home A for 731 days since Feb 2016, and you also lived in home B as your main home for 731 days since you bought it in December 2016, then you could qualify to use the exclusion on either home, but you can only use the exclusion once every 2 years, so you would exclude the gain on one home and pay the capital gains tax on the other.
