How to interpret the 2 of the 5 year primary home rule for capital gains on property?

[ccthealias]

I have a 2 family home that I have lived in 1 unit since I have purchased it. The other unit, I have rented it out most of the time with the exception of 5 months in 2019 and since March 2021. In order to benefit from the capital gain exclusion on primary home, i know i need to live in there for 2 years.  I am ok to give up rent for 2 years so that the whole house can qualify for the exclusion. can I add the 5 months and count 19 months from March 2021 to qualify

[Carl]

I have a 2 family home that I have lived in 1 unit since I have purchased it.... I am ok to give up rent for 2 years so that the whole house can qualify for the exclusion

No. Only 1 unit can be you primary residence at any one time. So you can only take the "2 of last 5" exception on the one unit that was your primary residence. Additionally, you can only take/qualify for the exclusion on one primary residence every 2 years.

[Critter-3]

You have made multiple posts so it may suit you to have a sit down with a local tax pro to get all your questions answered.  

But if I understand this question you are trying to figure out how to not pay cap gains on the rental side ... you can't since you cannot have both sides as a personal residence.  Even if you let the rental side go dormant for 2 years you will still owe the cap gains and must recapture depreciation as ordinary income.  This is the same if you moved into the other side and let your side go dormant.  There is no way around this unless you can get the property titled into 2 individual properties and sold one now and one later  ...  but again even if you did you still have to recapture the depreciation.

Now if you have not been properly depreciating the property as required  RUN RUN RUN to a local tax pro to get the mess fixed when you file the 2021 return.  The form 3115 is not a DIY project. 

[ccthealias]

@Carl - can you clarify why I wouldn’t be able to claim primary residence a 2 family house?  My family can occupy both units

 I.  Would the situation be different if I use it as a primary home starting at march 2021 and continue to use it until I sell at in march 2023?

[Carl]

You and your family can "occupy" as many units as desired. But for tax purposes, only one of those units can be declared as your primary residence for a given time frame. You can't have more than one primary residence at a time.

[Critter-3]

TALK to a local tax pro about this situation  ... the answer will depend on a lot of information (mostly state/local laws ).  You may  have  homestead issues to deal with as well as titling issues.   If you homesteaded the entire property but have been renting out 1/2 then you also have legal issues to deal with.  

[Mike9241]

no matter what depreciation must be recaptured before any exclusion can be used.  you face an additional issue with the rentals side because there's a special tax rule when the rental property is converted to a principal residence.

period of nonqualified use - the period after 2008 that it is owned but not used as a principal residence. (the period rented or left empty)

a simplified example

say you rented for 8 years then moved in for 2 years before the sale

your gain is $500K which includes a section 1250 gain of $100 (the depreciation which must be recaptured)

of the remaining gain of $400K, the nonexcludable portion is 8/10*$400K or $320K. the remaining $80k is taxable capital gain.   also, consider that generally the exclusion can be only used once every two years.  

what's the outcome if you remodel the two homes to covert to one home? interesting question. see a tax pro. 

[Critter-3]

I cannot stress this enough that you should seek local tax and legal assistance before you do anything ... this can affect many things including the homestead exemption.  You are ultimately responsible for your actions no matter what nameless faceless folks say on a public forum.  The penalties you could face alone with homesteading  issues would make the taxes you save seem like pennies.  

[Carl]

what's the outcome if you remodel the two homes to covert to one home?

For one thing, I'm confident it would cost you more than you could possibly save on taxes. As it stands right now, I'm quite confident the public records on the property assuming it's two physically attached duplexes, classify the structure as multi-family use and not single family use. So reporting the sale of the entire structure as your primary residence will tend to raise eyebrows at the least.

[ccthealias]

@Carl @I didn’t think it was such a big deal honestly. When I brought the place there was an internal staircase and the house was used as a duplex.  Will definitely check it out with an accountant….

[Carl]

Will definitely check it out with an accountant….

Not all accountants are "up to snuff" on tax law. That's why a tax pro is called for.