Does the Sale of second home converted rental property qualify for partial exclusion of gain if the conversion was due to work related move

Yes, it qualifies for the Reduced Maximum Exclusion.

When going through the rental section all all "assets", you indicate it was sold.  It should ask you if the home was ever your main home, then say yes and answer all of the followup questions.

Yes, for a work related partial exclusion, you must meet these requirements.

Does Your Home Qualify—Details and Exceptions

Partial Exclusion May Be Available

If you don't meet the eligibility test, you may still qualify for a partial exclusion of gain if you moved because of work, health, or an unforeseeable event. You can qualify either by meeting a set of standard requirements (the “safe harbor” provisions) or by showing enough facts and circumstances to validate your claim.

Work-related move.

You meet the standard requirements if any of the following happened during the time you owned and lived in the home you sold:

• You took or were transferred to a new job in a work location at least 50 miles farther from home than your old work location.
• You had no previous work location and you began a new job at least 50 miles from home.
• Either of the above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.

Thank you for the reply, but I couldn't find the place to enter that the sale of the rental property qualifies for the reduced max gain exclusion.   Also the software doesn't ask if this was ever my main home. Since I only have Turbo Tax premier, I am wondering if I need higher level of Turbo Tax product to handle this issue?

Thank you very much.

You are going through the rental "assets" and indicate it was sold, right?

When you get to the "Special Handling" screen, are you saying "no"?  If so, one of the next questions should be about your Main Home.

If you are saying "yes", what is the reason for the "Special Handling"?

The below is "GUIDANCE ONLY" to get you pointed in the right direction. Since the home does qualify (or partially qualify) as your main residence, the below guidance will fall apart on you at some point. But it will get you going in the right direction.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even it it's zero. Then you MUST work through the "Sale of Assets/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1

Basically, when working through an asset you select the option for "I stopped using this asset in 2019" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

At the screen "Special Handling Required?" I did click "yes". and the reasons listed on screen include:

- The business use percentage of the asset varied during the year you owned the asset.

- This is an intangible asset not considered section 1245 property.

- You converted the asset for 100% personal use.

- You gave this asset away as a gift.

- The asset was lost or destroyed due to casualty or theft.

- This asset was a rental, a home office, or a home office improvement within a home.

But to me none of these reasons apply to my case, and going forward from here didn't  lead me to the "main residence" question.

This is very confusing. Please advise. Thank you very much.

Thank you for you message. I will read it carefully this evening. 

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@al_li_2020 wrote:

At the screen "Special Handling Required?" I did click "yes". and the reasons listed on screen include:

....

 

But to me none of these reasons apply to my case, and going forward from here didn't  lead me to the "main residence" question.

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I agree that those don't seem to apply to you, which means you should be saying NO to the "Special Handling" screen.

Thanks @AmeliesUncle for catching that. Apparently, I was confused with another thread where the property was not sold. SO yes, you will select "NO" on the special handling required screen, and then you'll be prompted for sales information.

Thank you very much for your help.  I think I finally got it right to claim the partial gain exclusion for the home sale. It seems to me TurboTax has divided the gain for selling  this home into a rental business portion and a main residence portion, and the sale of the rental business portion is still taxed as an investment gain.  Please correct me if I am wrong, but if  my understanding is correct, what is the rule for Turbo Tax to make such a division? 

Thanks again.

Thank you too for your help.

@Mag Jen

If during the 5 year period before the date of sale, you used the home as your main home, then yes, you qualify for a partial exclusion. You will only get a partial exclusion for the length of time it was your primary residence.

If the last usage was rental, then record the sale in the rental portion of the program. If the last usage was personal, include it under Sale of Main Home, but be sure to include the depreciation so it can be recaptured.

@al_li_2020

You said, "It seems to me TurboTax has divided the gain for selling  this home into a rental business portion and a main residence portion, and the sale of the rental business portion is still taxed as an investment gain"

Yes, the house is treated as two properties. It was both a rental and a personal home. Each usage is treated differently. For your personal use portion, you can potentially exclude gain if you qualify. For the rental usage portion, not only can you not exclude gain, you have to recapture the depreciation taken.

No, for real estate it does not need to be split.  Are you entering 100% of the cost and price?  Or are you manually splitting things?

If you are entering 100%, then you may be misreading the "Nonqualified Use" page where it asks you for the number of days of ownership and the number of days of "Nonqualified Use".  In your case, because the rental was AFTER it was your main home, there is NOT any Nonqualified Use.

Updated:

Thank you @AmeliesUncle  for leaving this message, finally I could clear some confusion.

Your message reminds me to go searching for more details and I believed I have to enter 100%.

Thank you.

@AmeliesUncle 

"If you are entering 100%, then you may be misreading the "Nonqualified Use" page where it asks you for the number of days of ownership and the number of days of "Nonqualified Use".  In your case, because the rental was AFTER it was your main home, there is NOT any Nonqualified Use."

Please advise what I should have entered?

I owned a house 22 years, live in 12 years, rented out 6 years, move back to live in 2 years, and then rented out for 2 years and sold the house.  Should I enter 100% or 36.4% (=8/22) for business portion only?

Thank You.

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@Mag Jen wrote:

Please advise what I should have entered?

I owned a house 22 years, live in 12 years, rented out 6 years, move back to live in 2 years, and then rented out for 2 years and sold the house.  Should I enter 100% or 36.4% (=8/22) for business portion only?

Thank You.

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What section of the program are you entering this in?  In most cases, you should be reporting this in the rental section, while you go through the "assets" for depreciation to indicate they are sold (based on what you have said, you can say "NO" to the "Special Handling" screen).

You can still enter 100% of the sale.  But in your case, you DO have "Nonqualified Use" which will prorate your exclusion.  After you say it was your Main Home, it should walk you through things, but read the screens VERY carefully because it can be quite confusing.  In your case, you have about 6 years of "Nonqualified Use", so about 6/22nds (27%) of your gain will NOT be excludable by the $250,000/$500,000 Main Home exclusion (plus the depreciation is NOT excludible either, so your taxable gain will be higher).

You may also consider a good tax professional for this year.

Thank you very much!

I think you were talking about the page which asked the following:

"Did you use this home for anything other than your primary home? Let us know if there was any time after 2008 where you used your home for reasons other than as your primary home (followed by a link explaining what Nonqualified Use of a Main Home is).

Then a Note: If you used your home for reasons other than as your primary residence after it was no longer your primary home, select "No".

It make a huge difference in terms of the Federal tax I owe by selecting "No" instead of "Yes". 

Thank you very much for helping me find this mistake!

Correct.  For purposes of that page/question (Nonqualified Use), any time AFTER the LAST time it was you Main Home does NOT count.

@AmeliesUncle 

Yes, I entered the sale under the rental section.

Wages & Income -> Rental Properties & Royalties ….-> Sold

Special Handling: answer "NO"

Sales Information

Enter the following information about the sale of this asset.  You must divide, or allocate the sales price and expenses between the land and the asset (improvement) based on their fair market values.

Asset Sales Price (Business Portion Only) _________

Asset Sales Expenses (Business Portion Only) ________

Land Sales Price (Business Portion Only) ___________

Land Sales Expenses (Business Portion Only)___________

So, instead of answering 100% sales price, I should have entered 27%?

Thanks.

No, enter 100%.

That section ("business portion only") is just set up for general "assets".  For real estate, you can enter everything as 100%.