Due to a military move i had to rent my house. I just sold the rental. Am I exempt from Capital Gains?

[IsabellaG · Accepted solution]

You may be able to exclude all or part of the gain on your home, if it was your principal residence, and if you meet the ownership and use tests.

For most taxpayers, they must have owned the home for at least 2 of the 5 years prior to selling it, and have lived in the property as their main home for at least 2 years.

If you served on qualified official extended duty as a member of the Armed Forces, you can choose to suspend that 5 year period for up to 10 years, which may enable you to meet the 2 year use test.

You can only suspend the 5 year period for one home at a time, and you can only exclude the gain on the sale of a main home once every 2 years.

For a rental property that used to be your personal residence, you still would be subject to income tax to the extent that you claimed or could have claimed depreciation on the property for the years that it was a rental. This is known as “depreciation recapture,” and is handled in the Rental section of Turbo Tax.

Please see the following links for more information and examples:

https://www.irs.gov/publications/p3/ar02.html#en_US_2014_publink1000176229

https://www.irs.gov/pub/irs-pdf/p523.pdf

https://www.irs.gov/uac/Highlights:--Military-Family-Tax-Relief-Act

[greener6095]

So would this active duty person just report the sale of the home/rental in 'sale of home', and not in sale of rental property or sale of business property, if they meet the cap gains exclusion criteria?

[gojoe99]

This is exactly the situation I'm in, however there are no instructions on how to use the Tax Software in order to account for this military exemption. 

Does anyone have an answer for this? 

[Hal_Al]

You can enter the sale as a home sale, instead of in the rental section.

In TurboTax (TT), enter at:
- Federal Taxes tab (Personal in  Home & Business)

 - Wages & Income

Scroll down to:

-Less Common Income

     - Sale of Home

When asked if you meet the 24 month rule, answer yes, since you know you meet the military exception.   Lying to TurboTax to get it to do what you want does not constitute lying to the IRS. This is explained at the Learn More link on that page.  Later, the interview will ask if you claimed any depreciation. Enter the total amount you claimed while it was rented out.  TurboTax will treat that part (depreciation recapture) as taxable. 

Using an example: you bought a house for $100,000, later sold it for $150,000 and took $15,000 depreciation. $50,000 of the $65,000 capital gain will be tax free due to the home sale exclusion.  $15,000 will be taxable, as a section 1250 gain (taxed at ordinary income rates, but not more than 25%).

[AmeliesUncle]

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@Hal_Al wrote:

Enter the sale as a home sale, not in the rental section.

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I disagree.  It was a rental when it was sold, it should be reported in the rental section.  When you sell the property in the rental section, it DOES ask you the questions about the Principal Residence exclusion.

[islavet]

Is there any conclusion on which is appropriate? When I enter the info under personal home sale, our capital gains are excluded. When I enter it under the rental section, even if I properly state our military status, there is a large tax bill and much of the capital gains are taxable. I don't know what to do!

[Hal_Al]

Q.  Is there any conclusion on which is appropriate?

A.  Yes and no.  Either way is "correct" if it gets the right results. I recommend the home sale entry because it's simpler (as you have found out).  But  I have noticed that most experts, in this forum recommend the rental section

You say "When I enter the info under personal home sale, our capital gains are excluded".  That part is  correct.  If it also treated the depreciation recapture as taxable, you should be good.  The fact that TurboTax lets you do it there is your assurance that it's appropriate. 

[janellelrust]

@IsabellaG 

I believe I qualify for exclusion under the 10 year suspension of the 5 year lookback.  Looking for confirmation:

Home purchased May 2006.  We lived there until April 27, 2013.

Military moved us out of state and home became a rental on 1 May 2013.  

We did not return to the state where this house is located until I retired effective 1 July 2023.

I plan to sell this house in October of 2025.

I'm calculating that we can exempt our capital gains.  I do understand the recapture for depreciation, so only looking at capital gains exemption.  Do you agree we can exempt?

Thank you!

[AmeliesUncle]

If you or your spouse were on "Qualified Extended Duty" (see link) from 2013 to 2023, yes, you seem to qualify for the exclusion.

One note of caution:  The questions in TurboTax for selling your main home can be confusing and they are even more confusing when deal with the Qualified Extended Duty rules.

https://www.irs.gov/publications/p523#en_US_2023_publink100076987