Can I prorate capital gains if we lived in a place for less than 2 years, rented for 4 years? We converted it into rental property when I was transferred by my company to the US.

jaxolist · Aug 30, 2021 1:58:11 PM

Like the title suggested, here's a timeline of our property: Bought and lived from Oct/2015 till Jul/2017;Transferred to the US by my company in Jul/2017;Rented from Sep/2017 till May/2021;Sold in Jul/2021. This property was owned by me and my wife together, and we have owned and used it as our primary residence for roughly a year in the past 5 years from selling date. We never used it as rental property before using it as primary residence. The reason for selling is because of my job relocation & change in immigration status, when early this year it looks like I won't be kicked out of the country by the time my visa expires next year (before this I was working on a working visa that expires in 5 years and cannot be extended). I thought the period of renting out would not count as non-qualified use, and the sale would qualify for the safe harbor as discussed in some other posts. Consequently, it would qualify us for roughly half the maximum exclusion amount, sine there was 1 year of primary residence in the past 5 years by me and my wife. But thought I would like to check with the forum if my understanding is correct for my circumstances. Thank you for your help!

Tagteam pointed out a rather important aspect that you must be clear on.

When you sell the property, all depreciation must be recaptured in the year of the sale. That recaptured depreciation is taxable no matter what, with no exceptions. It is not included in the "2 of last 5" rule. Take note that the recaptured depreciation does get added to and included in your overall AGI. Therefore, it is perfectly possible the increased AGI could bump you into the next higher tax bracket.