@ffchou2020 wrote:
thank you for the great example...just to clarify--1) NOT all the capital gain within the 250K exclusion is tax free and 2) the portion that qualifies is the ratio of time spent as the owner over the total time of ownership--in this case 4 out of 9 years.
I'm not sure you have the concept.
Qualified ownership is the time you owned the home and lived in it as your main home, expressed as a percentage of the total time you owned the home. When you move back into a rental as your personal home, the time it was used as a rental is non-qualified for the exclusion. In your case it appears that 5/9th (55%) of the time you owned the home is non-qualified, and 4/9 (45%) is qualified, although Turbotax will calculate the percentage based on the exact dates you bought the home, moved in as your main home and the selling date. (And the longer you own the home and live there as your main home, the higher the percentage will get, although it will never get to 100%.)
You first pay income tax on the part of the gain due to depreciation (recapture). That is never covered by the exclusion.
Then in your case, 55% of the remaining gain is non-qualified and fully taxable.
The last portion of the gain (45% after depreciation) is eligible for the exclusion. If that eligible portion is less than $250,000 (or $500,000 if married filing jointly), then that portion of the gain will be covered by the exclusion. If that remaining 45% of the gain is more than your exclusion, you will apply the exclusion ($250,000 or $500,000) and then whatever is left over will also be taxable capital gains.
