Selling a Foreign Rental Home that was Previously my Primary Home

[steflach23]

Hi,
I had a home in Germany that I just sold in July 2022 that I started renting out in Jan 2018 until June 2022. During this time from 2018 to 2022, I did report the rental income on my annual tax returns. I did live in the home myself from October 2003 until January 2018 when I started renting it out. I'm filing my taxes right now to report the capital gains and I do not qualify for any of the exclusions (i.e., living in the home 2 years of the 5 prior to selling, etc.,). Is there any way I can avoid being taxed on the entire capital gain plus depreciation (Paid $327,123 for the home in 2003 and sold it for $598,382)? I've been using TurobTax (Rental Properties and Royalties) in the past years. I would appreciate any guidance you can provide. Thank you.

[Carl]

Basically, if you did not live in the home as your primary residence for at least 2 years (730 days) of the last 5 years (1826 days) you owned it, counting back from the closing date of the sale, then you do not qualify for any exclusion. However, there are some exceptions that "may" qualify you for a partial exclusion. See IRS Publication 523 at https://www.irs.gov/pub/irs-pdf/p523.pdf and read the section, "Does Your Home Qualify for a Partial Exclusion" starting on page 6 of that document.

If you are AD/MIL, let us know, as that day count suspension rules may (or may not) apply here.

[steflach23]

Thank you, Carl.  I did have to move because my job required me to move (work-related move) back to the United States from Germany in 2017 and then I rented the home out starting in 2018.  I'm just not sure if that partial exclusion fits this, since I rented out the home up to the time I sold it last year?  What would your interpretation be on that?  Again, thanks.

[DaveF1006]

No. According to the IRS, You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. 

You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. 

You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale.

In your case, you did not live in your home at any time in the previous five years thus you would not be eligible for the extension.  The only exception to this rule is If you or your spouse are on qualified official extended duty in the Uniformed Services, the Foreign Service or the intelligence community. If so,  you may elect to suspend the five-year test period for up to 10 years. 

An individual is on qualified official extended duty if for more than 90 days or for an indefinite period, the individual is:

• At a duty station that's at least 50 miles from his or her main home, or
• Residing under government orders in government housing.

Please refer to IRS Topic 701 for further assistance. 

@steflach23 

[steflach23]

Thanks, Dave.  I sure appreciate the feedback.  Unfortunately, there is no exclusion for living in the house for 14 years prior to having to depart while working for the Department of Defense, as a non-active duty military member.   🙁