First, your rental time is non-qualified for the personal exclusion. This isn't explained in publication 523 (the IRS stopped trying to explain in in 2013 or so, but the calculation is included in worksheet 2 in publication 523.) The exclusion is not intended for landlords to convert taxable rental property into non-taxable gains on personal property, so the rental time is not eligible for the personal exclusion. If you owned the property 9 years but rented it for 5 years, then 5/9th the gain is non-qualified. (You will figure it to the month or the day.)
Second, you must recapture any depreciation you claimed or could have claimed.
Third, remember that you can include certain closing costs in your adjusted basis, and you can reduce the selling price by certain items. These are listed in publication 523.
Example:
- Purchase price in 2014 was $200,000.
- Depreciation you took or could have taken for 5 years of rental is about $32,000.
- Adjusted cost basis is $168,000.
- Selling price is $400,000
- Capital gains is $232,000.
- The first $32,000 is taxed as ordinary income (with a cap at 24% I believe).
- Out of the next $200,000 of gain, 5/9th or $111,111 is non-qualified, and is taxed as long term capital gains at 15% for most people.
- The remaining 4/9th of the gain, or $88,888 is qualified for the exclusion. Since you meet the rules for the exclusion, you can exclude up to $250,000 of the gain. Since this is more than the qualified gain, the qualified gain is not taxable.
