$500,000 capitol gains exclusion on our rental property that we moved into it for 2 years?

[luckeman]

We bought our rental property in 2008 and rented it until 2018. We moved into it in 2019 and lived in it for 2 years. We are now selling it and want to know if we can take the $500,000 capitol gains exclusion?

[Critter-3]

You can however the depreciation taken or allowed must be recaptured first.  

[Anonymous_]

You might want to consult with a tax professional since you have qualified and non-qualified use (after 2008).

See https://www.irs.gov/publications/p523#en_US_2021_publink100077085

As a result, your exclusion of gain will be reduced accordingly.

[Mike9241]

a) your nonqualified use is the period from the date you purchased it to the date you occupied it as your principal residence

b) your total ownership period is the period from the date you purchase it to the day before it was sold

c) your total gain is the sales price less selling expenses less your cost reduced by the depreciation allowed or allowable.  usually, this would be the gain before depreciation

d) your total gain is reduced, but not below zero, by the depreciation to arrive at your adjusted gain

e) your nonexcludable gain is a) divided by b) times d)

example 

a) 10 years

b) 15 years

c) purchase price + closing costs = $560,000

selling price $1,510,000 with selling costs of $50,000 = net sales price $1,460,000

cost $560,000

depreciation $200,000

net tax basis $360,000

total gain $1,100,000

d) total gain reduced  by deprecition =  $900,000 = adjusted gain

e) nonexcludable portion 10/15*$900,000 = $600,000

summary of example

taxable LTCG $600,000

depreciation recapture - $200,000 section 1250 recapture

excludable gain $300,000

[Hal_Al]

Confirming what Mike9241 said: you may only claim a prorated exclusion of the capital gain.  You owned the home 14 years (2008-2022) and lived in it 3 years (2019-2022).  You may exclude approx.  21% (3/14) of the gain, up to $500,000.  In addition, you must recapture all the depreciation allowable during the rental time (period of non qualified use). That is, the recaptured depreciation is not included as  part of the exclusion calculation. For the calculation, you count your time in days  or months. For example, you owned it from Oct 2008 to July 2022 and lived in it from March 2019 to July 2022, you proration % would be 40 months /165 mo. = 24%

For others reading this: The gain will be prorated between the residence time and the rental time. Only "non qualified use" after 2008 is prorated. Deprecation since May 6, 1997 must still be recaptured, even in a  home sale exclusion situation.

References:

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/re-gifted-rental-property/01/173...

https://ttlc.intuit.com/questions/4472518-we-moved-into-our-rental-property-and-now-less-than-two-ye...

[Carl]

Because you were the last occupant to vacate the property as your primary residence prior to the sale, you may not qualify for the full exclusion. But you will get something. For the period of time you owned it after 2008 up until the time you moved into it, is "unqualified use" and will count against you. But something is better than nothing.

Also, when you sell the property you are required to recapture all depreciation taken while it was a rental, and you will pay tax on that recaptured depreciation, no matter what. The recaptured depreciation is not included as a part of the exclusion.