Owned home for 14 years then rented for a tad over the last 3 years before selling

[keystone20045]

Hello,

We owned our primary residence for a tad over 14 years. We then rented it for a tad over 3 years before selling it this year. It was rented for a couple months in 2017, all of 2018, 2019 and 2020 and then a couple months of this year. 

I have researched it to death and I don't see any way around us having to pay capital gain taxes on the the house (outside of a 1031 exchange which I think we are a bit late on the timing to do now)?

Is that correct or is there anything I might magically be missing in my favor? Thanks in advance. 

Keystone20045

[lufffy]

hah I just asked a similar question after extensive research but yeah unfortunately it seems like you JUST missed the 24 months of primary residence and since you sold it you could not move back in for a few months.

It maybe a good time to get every single receipts you have and start finding deductions.

Eligibility Step 2—Ownership

Determine whether you meet the ownership requirement.

If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.

Eligibility Step 3—Residence

Determine whether you meet the residence requirement.

If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.

If you were ever away from home,

you need to determine whether that time counts toward your residence requirement. A vacation or other short absence counts as time you lived at home (even if you rented out your home while you were gone).

If you become physically or mentally unable to care for yourself,

and you use the residence as your principal residence for 12 months in the 5 years preceding the sale or exchange, any time you spent living in a care facility (such as a nursing home) counts toward your 2-year residence requirement, so long as the facility has a license from a state or other political entity to care for people with your condition.

[Opus 17]

If you moved due to one of the unforeseen events described in publication 523 under "do I qualify for a partial exclusion", then you can qualify for a partial exclusion (events like, job change with a move, or medical situation that made the previous home unsuitable).

If this was just your choice to move, you lost the exclusion by taking too long to sell.  Sorry. 

[keystone20045]

Thanks for your reply. I have been reading Pub. 523 in detail and I believe we do qualify for an exclusion due to "an unforseeable event that made that the home less suitable as a main home for a specific reason". I kind of got lost figuring it out from there though. Seems like it calculated our pro-rated amount of the exclusion and then it went into the rental income and I lost it from there. 

I know it won't be 100% accurate for 2021, but I was thinking about going back into the 2020 software and pretending like we sold it and see what it tells us.? Not sure how or where we document the unforseeable event. I have reached out for some CPA referral suggestions, but haven't talked to one yet.  

• The home became significantly less suitable as a main home for you and your family for a specific reason.

Other Facts and Circumstances Even if your situation doesn’t match any of the standard requirements described above, you still may qualify for an exception. You may qualify if you can demonstrate the primary reason for sale, based on facts and circumstances, is work related, health related, or unforeseeable. Important factors are: • The situation causing the sale arose during the time you owned and used your property as your residence. • You sold your home not long after the situation arose. • You couldn’t have reasonably anticipated the situation when you bought the home. • You began to experience significant financial difficulty maintaining the home. • The home became significantly less suitable as a main home for you and your family for a specific reason.

[Opus 17]

@keystone20045 

You don't send any documentation of the circumstances to the IRS, but keep records for at least 6 years in case of audit.  You just check the box in the program to claim the partial exclusion.

The partial exclusion is based on the shortest of 3 time periods:

• the number of days you lived in the home as your main home looking back 5 years from the closing date
• the length of time you owned the home
• the length of time since you last used the capital gains exclusion on the sale of your main home.

Assuming a sale date of June 30, 2021, you would look back to June 30, 2016, and count how long you lived in the home as your main home between those two dates.  The periods do not have to be consecutive.  What counts is when you moved out, not when the rental started, so if you moved to a new main home in July 2017 but did not get a tenant until September, you would use the July move-out date.

You will still have to pay capital gains tax on your depreciation.  It's going to work something like this:

Assuming a purchase price in 2003 of $50,000 and a selling price of $400,000 in 2021.  You can prove $20,000 of remodeling costs as adjustments to your basis.  During the time the home was a rental, you claimed or could have claimed $5,000 of depreciation.  Therefore, your adjusted basis is $65,000.  Your capital gain is $335,000.  You first pay depreciation recapture tax on the previous depreciation ($5,000), at ordinary income rates with a cap of 25%.   Then the remaining $330,000 gain is considered for the partial exclusion.  Since you said "we" I will assume you will be filing married filing jointly.  Your exclusion in my example above would be 13/24th x $500,000 which equals $270,833.  That would leave $59,166 to be taxed as long term capital gains. 

Yes, you can use the 2020 program for an estimate.  However, if using the online program, make a new account, don't modify your already-filed tax return.  And you won't be able to see the details in the online program unless you pay another fee.

[Carl]

Keep in mind that even if you qualify for a partial excusion, the recaptured depreciation is not included in the exclusion. You will pay taxes on the recaptured depreciation, no matter what. Being that it was a rental for only about 3 years, the recapture amount shouldn't be all that much really. But it's still included in the taxable income, and it does get added to your overall AGI, which means there is a potential that it could bump you into the next higher tax bracket.

[AmeliesUncle]

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@keystone20045 wrote:

• The home became significantly less suitable as a main home for you and your family for a specific reason.

Other Facts and Circumstances Even if your situation doesn’t match any of the standard requirements described above, you still may qualify for an exception. You may qualify if you can demonstrate the primary reason for sale, based on facts and circumstances, is work related, health related, or unforeseeable. Important factors are: • The situation causing the sale arose during the time you owned and used your property as your residence. • You sold your home not long after the situation arose. • You couldn’t have reasonably anticipated the situation when you bought the home. • You began to experience significant financial difficulty maintaining the home. • The home became significantly less suitable as a main home for you and your family for a specific reason.

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It was not sold soon after the situation arose.  You waited over 3 years.

If you had met one of the "safe harbors", that does not apply.  But if you are trying for the "other" situation reason, the sale would have needed to happen shortly afterwards.  Renting it out for 3 years invalidates that.