capital gains

[elkdown2021]

My spouse and I have rented a condominium to our adult child at fair market value beginning in 6/3/2011 for which we claim rental income and depreciation. In 2019 our child/renter began a battle with alcoholism and mental illness which resulted in losing his business in June of 2020 and his inability to pay rent or any other living expenses. In addition my spouse was residing at the residence on a non-continuous basis caring for our mentally ill adult child. In 2021 the decision was made to sell the rental property at which time our adult child vacated the residence to seek other arrangements. We made a substantial profit on the property and believe we qualify for a partial exemption based on health and employment safe harbor exclusion rules. We have determined that my wife resided at the property for a total of 17 non-continuous months within the 5 year qualifying period (from date of sale) and it was 17 months from the time our child's LLC was dissolved (documented) to the date of the sale.

Questions/issues:

If I report the sale of our property in the "rental properties and royalties" section of turbo tax the program does not ask for any information regarding safe harbor, partial residency,  or any exemption information and indicates a tax liability for the entire gain from the sale.

If I report the sale in the "less common income" section of turbo tax under "sale of home (gain or loss)" it asks for qualifying exemption information but disqualifies the property under the non-qualified use question and again indicates a tax liability for the entire gain from the sale.

Not sure what to do here please advise.

[AmeliesUncle]

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@elkdown2021 wrote:

believe we qualify for a partial exemption based on health and employment safe harbor exclusion rules. We have determined that my wife resided at the property for a total of 17 non-continuous months within the 5 year qualifying period (from date of sale) and it was 17 months from the time our child's LLC was dissolved (documented) to the date of the sale.

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Before anybody can address the "how", we should clarify the "if" you qualify.  At first glance, you don't seem to qualify.

The exclusion is based on the time it was your (in your this case, your wife's) "principal residence".    A non-continuous period, for purposes of taking care of your son does not seem that it was her "principal residence".  I suspect most of her belongings were at your main home.  I suspect she did not change her driver's license, bills, etc. to the other home.  Again, that is only my guess, but it seems likely she was not making it her "principal residence".

Secondly, in order to qualify for the reduced exclusion (living there less than 2 years in a 5 year period), it had to have been her principal residence, then some circumstances happened while it was her principal residence that created a reason to move.  That does not seem to be the case in your situation.

[Mike9241]

i don't think you meet the unforseen circumstance criteria.  what prevented you from renting to others? 

you would run into a different problem claiming it was your spouse's principal residence, then part of most expenses might not be deductible and others like a pro rata portion of taxes and interest might have had to have been taken on schedule A rather than E,

for the years rented for less than fair rental, you probably weren't entitled to report any expenses on schedule E, the tax laws would require the property to be treated as a personal residence.