Sale of Rental property - capital gains exclusion

[JohnAmussen]

My mother (I'm doing her taxes) sold her rental property last February. She had been renting it for 5 years (and lived in it for 6 years previously), but qualifies (I believe) for an exclusion from Capital gains because she had a stroke and had to move to an assisted living facility.

I don't know how to reflect that in Turbotax - it doesn't have a place to note potential exclusions. How do I handle this?

[Carl]

IRS Publication 523 at https://www.irs.gov/pub/irs-pdf/p523.pdf on page 3, 3rd column states:

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

Based on my understanding and interpretation of your post, the property was not her primary residence for "at least" 12 months counting back 5 years from the closing date of the sale. So she doesn't qualify for the exclusion at all.

[gloriah5200]

No, unless you did not correctly state the situation in your question, your mother does not qualify to exclude the gain on the sale of the rental property because she does not qualify.  Was the house a single family dwelling?

It will have to be reported as the sale of an income-producing property with the adjusted basis being reduced by the depreciation allowed or allowable, whether she deducted it on her return each year or not.  If she did not deduct depreciation, then since it has been 5 years, you may need to use Form 3115 Change of Accounting Method to give her the deduction on her current year return of the "catch-up depreciation" and it will help offset the taxable gain.

Please refer to the following link for additional information on using Form 3115, Change in Accounting Method to deduct "missed depreciation" for a rental property sold:

Form 3115 Change in Accounting Method

Where was she living at the time she had a stroke and had to move to an assisted living facility?  

If the house sold was a rental the last 5 years, then you are implying that she was not living in it for 5 years prior to the sale.

If you owned and lived in the house sold for two of the five years before the sale, then up to $250,000 of profit is tax-free.  Your mother does not meet this requirement if it was a rental property the 5 years before the sale.

In order to exclude a gain on the sale of your principal residence, it has to qualify as your principal residence.  It would not be considered her principal residence if it was a rental property.

You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for two of the five years leading up to the sale, and haven't claimed the exclusion on another home in the last two years.  Your mother did not live in it during the 5 years leading up to the sale.

Unfortunately, I don't see how she can meet this requirement since it was a rental house for 5 years prior to the sale.  It was the 6 years prior to the 5 years of rental use when she lived in it as her principal residence...

[Edited 04/13/2021|3:35.pm pst]

[JohnAmussen]

To be clear: She purchased the house in July 2010 and resided there through July 2016, when she had her stroke. Once she was released from the hospital, she moved into a state-licensed assigned living facility. 

It sounds like this means $250,000 of the capital gains are excludable. If so, how do I reflect this in turbotax?

[Carl]

If the closing on the sale of the house was before July 2020, there's no way possible to qualify for the exclusion. Otherwise, work through it and read "EVERY" option so you select the one for health reasons. Also, answer every question "LITERALLY".

When asked if it includes the sale of her main home, select YES.

When asked, "was the home her primary residence for 24 of the last 60 months she owned it?". The only possible correct answer to that question is NO. Then press on for other options.