2-Out-of-5 year rule - questions on application

[achiang1009]

I am married filing jointly, but was the owner of an apartment that I sold in 2019.  Details:

- Purchased in Feb 2012 and it served as my primary residence

- Started renting it out in Jan 2017 (no longer lived there)

- Sold it in Dec 2019

Does the 2-out-of-5 year rule apply?  Do I have to pay capital gains on the gain of $150,000?

Thanks you in advance for your expert advisement.

[ColeenD3]

If you sold it in Dec 2019, you had to live in it as your primary residence for 2 years between Dec 2014 and that date. It appears that you did. 

You can exclude up to $500,000 of the gain, but that does not include any amount included in the depreciation you took. You have to recapture all the depreciation. If you have any capital gain over and above that, it can be excluded.

@achiang1009

[widy]

Hi,

I have the same case where I live in the house since Nov 2014 and I rented out on July 2020. I am planning to sell the house on Mar 2021. Does the title have to issue 1099-S when I sell the house? They told me that they are supposed to issue 1099-S since it is used for rental before.

If they issue 1099-S, how do we enter it in turbotax so it will excludes the capital gain?

Thank you,

Widy

[AmyC]

You state that your house was a rental at some point in time. Was this a rental before you lived there, after, or did you rent a room out while you lived there? The amount of profit will play into this, so the basis needs to be right.

Years ago, people would rent houses, then live in them as a main house and sell without worry about the rental. The government closed that loophole. If your house was ever a rental, you must deduct the depreciation you took while as a rental from the basis of the house. You can see Publication 523 (2019), Selling Your Home | Internal Revenue ... for details. /also,  See Topic No. 701 Sale of Your Home.

@widy

[widy]

@AmyC 

I lived in the house for about 6 years. Then, I bought another house and move to new house. I rented the house for about 1 year and sold the house after renting it out for 1 year. This should goes under 2 out of 5 year rule, correct?

[AmyC]

No. You lived in the house 6 years, rented it for one year, and then sold it. Because it was a rental house at the time you sold it, there are special rules to the 2/5 rule. Please see pub 523, section Rental Use of Home, for full details and calculations.