@keystone20045
You don't send any documentation of the circumstances to the IRS, but keep records for at least 6 years in case of audit. You just check the box in the program to claim the partial exclusion.
The partial exclusion is based on the shortest of 3 time periods:
- the number of days you lived in the home as your main home looking back 5 years from the closing date
- the length of time you owned the home
- the length of time since you last used the capital gains exclusion on the sale of your main home.
Assuming a sale date of June 30, 2021, you would look back to June 30, 2016, and count how long you lived in the home as your main home between those two dates. The periods do not have to be consecutive. What counts is when you moved out, not when the rental started, so if you moved to a new main home in July 2017 but did not get a tenant until September, you would use the July move-out date.
You will still have to pay capital gains tax on your depreciation. It's going to work something like this:
Assuming a purchase price in 2003 of $50,000 and a selling price of $400,000 in 2021. You can prove $20,000 of remodeling costs as adjustments to your basis. During the time the home was a rental, you claimed or could have claimed $5,000 of depreciation. Therefore, your adjusted basis is $65,000. Your capital gain is $335,000. You first pay depreciation recapture tax on the previous depreciation ($5,000), at ordinary income rates with a cap of 25%. Then the remaining $330,000 gain is considered for the partial exclusion. Since you said "we" I will assume you will be filing married filing jointly. Your exclusion in my example above would be 13/24th x $500,000 which equals $270,833. That would leave $59,166 to be taxed as long term capital gains.
Yes, you can use the 2020 program for an estimate. However, if using the online program, make a new account, don't modify your already-filed tax return. And you won't be able to see the details in the online program unless you pay another fee.
