Is there any tax benefit if I move back to my rental property for a few years before I sell?

[keithl1]

Hi, I bought a house in 2000. I stayed there until 2015 and turned it into a rental property. I'm considering to move back in for a few years before selling it and move out of state when I retire. I read the Housing Assistance Tax Act of 2008 has changed how the capital gain exclusion for primary residence is calculated. I have a few questions:

-- Is it correct that I have to convert my rental back as my primary residence for at least two years before I can claim any capital gain exclusion despite the fact that I lived there from 2000 to 2015?

-- If I move back into the rental for 5 years and sell it in year 2030, how do I calculate the nonqualified use period for capital gain exclusion? Do I start with year 2000 when I purchased the home or end of 2008 when the Housing Assistance Tax Act of 2008 took effect? If I start with year 2000, I have 20 years of qualified use (2000 to 2015 and 2025 to 2030) and 10 years of non qualified use (2015 to 2025). If I start with end of 2008, I have 12 years of qualified (2008 to 2015) and 10 years of non qualified use.

-- I'm married but the house was bought when I was single. I have never filed a quit claim deed to add my wife into the title. Do I need to add her name to the title in order to qualify for the $500,000 capital gain exclusion? 

Any advice will be appreciated.

[Bsch4477]

You qualify for the $500,000 exclusion after you and your wife live in it as your primary home for 2 years even though she is not on the deed. 

[Mike9241 · Accepted solution]

your wife does not have to be on the title. 

period of non-qualifies use does not qualify for the exclusion IRC 121(b)(5). this means that a portion of the gain may be taxable if not used as a principal residence. period of non-qualified use is any period after 2008that the property was not used as your principal residence.

period of nonqualified use 2015-2025 = 10 years (rental)

period of ownership 2000-2030 = 30 years 

depreciation to the extent of the gain must be recaptured

gain =  sales price less cost reduced by depreciation allowed or allowable

non excludable gain (sale price less depreciation) times 10/30

example sales price $1,001,000, cost $275,000, depreciation, $100,000 

gain $1,001,000 - ($275,000-$100,000) = $826,000

$100,000 gets reported as section 1250 recapture subject to reduction for any net short-term capital gains

non excludable gain ($826,000-$100,000)  = $726,000*10/30 = $242,000

excludable gain $826,000-100000-242000= 484000

taxable gain 826000-484000=3420000  (this includes section 1250 recapture

[keithl1]

Thank you so much for the information. Just one more question. If I do not move back to the rental property and opt to just sell it instead, can I still benefit from the capital gains exclusion based on having previously living in the property for 15 years? Or will I need to meet the 2 out of 5 years rule in order to do so?

[Bsch4477]

You need to meet the 2 out of 5 years rule in order to do so.