Tax help for military filers

It sounds like the property was converted to a rental 2 years ago, that would be August 2019 (more or less)?

 

That means that for 2019, 2020 and 2021, you need to include a schedule E for the rental with your tax return, that reports your rental income, subtracts rental expenses, and pays income tax on the net income (if you had income).

 

Then, when selling the home, you still qualify for the basic capital gains exclusion for meeting the 2 year/5 year rule.  (And in fact, the 5 year rule can be suspended up to 10 years for service persons who are redeployed, but that does not seem to be an issue here.)

 

However, as part of the capital gains calculation, you will have to pay tax (depreciation recapture) on the depreciation deduction you took or could have taken on your schedule E.  Then, the rest of the gain is subject to the $250,000/$500,000 exclusion.    Basically, you got a deduction for depreciation while renting the home, and now that you've sold it, you have to repay that deduction.   You will need to know the amount of depreciation from your 2019 and 2020 tax returns when reporting the sale on your 2021 return.