Selling a Rental Home (prior Primary Residence) using Pub 523 (Service, Intelligence, and Peace Corps personnel) up to 10 year suspension for 2/5 rule

[wmgman]

I am trying to figure out just how to file sale of a Rental Property that was a Primary Residence under the rules of Pub 523 (Exceptions to the Eligibility Test => Service, Intelligence, and Peace Corps personnel => Qualified extended duty). I I cannot use the "Served in the US Armed Forces" checkbox (per the question under Personal Info => "You & Your Family" in TurboTax Home & Business), but don't know if that matters to getting this input properly.

Rough Timeline:

1991: purchased home

1991 - 2001: Primary Residence

2001 - 2006: Converted to Rental Property

2006 - 2010: Primary Residence

08/2010 - 02/2018: Converted to Rental Property (on orders per exemption in Pub 523)

02/2018 - 06/03/2020: Remained Rental Property, but I was no longer on orders

06/26/2020: Property Sold

Purchase Price: $115K

Depreciation over the period of rentals (~15 years): $51K

Sale Price: $250K.

Using this timeline based upon Pub 523 adds about 7.5 years to the 2 of 5 year test period, becoming a 2 of 12.5 year test period. I had 2.5 years in the property as my Primary Residence. When entering this Rental Property sale into TurboTax, it appears to be charging me Tax on the Capital Gains and does not ask me anything related to the exemption for a Primary Residence. This sale generates a jump in tax of over $31K when I was only expecting about $13K for the Depreciation Recapture.

How do I enter this sale in TurboTax to take advantage of the tax code? Do I have to first convert this property out of rental status (somehow)? 

Thank you.

[AmeliesUncle · Accepted solution]

You are reporting the sale in the rental section, right?  You are going through each "asset", indicate it is sold, and then enter the sale price, right?

If so, the program is SUPPOSED to ask you if it was your main home, and answering yes to that will prompt the questions about the exclusion.  If it is not doing that, sometimes this early in the year there are glitches that cause the program to miss questions, so you may need to wait a few weeks and try again.

But you are right, in your case you should only be paying tax on the gain due to the depreciation.

[wmgman]

Based upon your assurance that I was in the correct place, I spent a bunch of time stepping through options and did finally get TT to handle the taxes properly (though I don't think my answers to get there were the right ones). This is obviously going to require a bit more personal review before filing to make certain everything is correct.

Thank you.

[sdowning720]

I am experiencing a very similar situation and am trying to make sure I am interpreting the law properly and that I understand how that gets entered into turbotax.

Purchased home Feb 2017

Overseas Assignment with Intelligence Community Nov 2020 - Jun 2023. (2 Years and 7 months)

During the overseas assignment we rented the property and have not moved back into it since.

Planning to sell the property as soon as the lease ends (Nov 2025) 

My understanding is that I can exclude 2 years and 7 months  (the length of my tour) from the 2 out of 5 year eligibility test.

If for instance I sell the property in December of 2025, I can extend  eligibility rules by the 2 years and 7 months that I was abroad with a qualifying intelligence community position.  

Therefore taking the 5 year eligibility test back to June of 2023 - June 2018. I lived in the house for 2 years and 4 months of that timeframe. 

Do I just record the sale in the rental section once it occurs. Any advice would be greatly appreciated on how you recorded this. 

[RobertB4444]

Yes, you will just record this in the rental section.  You will have depreciation recapture but you will also get a partial exclusion using the formula you laid out (which sure seems correct to me).  

@sdowning720