Primary residence converted to rental property and then sold. Do I still qualify for the 250k/500k tax exemption?

[michellefyu]

My husband and I bought a townhouse in 2013. We lived there 2013-2017. In June 2017 we bought a new house and rented this townhouse out. Since June 2017 the unit is a rental property. 

If I sell the unit now, there will be a capital gain. Should the sale be considered as “main home” and thus qualify for the 500k capital gain tax exemption, or “rental property” without any tax exemption? IRS specifies the property has to be a “main home” with 2 year of primary residence out of 5 years in order to qualify for the exemption. But isn’t my unit a rental property? Is it correct to claim the sale as main home sale?

If the sale is considered “main home” sale, do we get 100% of the exemption (not just a percentage of it based on the number of days as primary residence)? 

[Coleen3]

It can be both. While it is a rental property in terms of having to recapture any depreciation you have taken, if you live there in the 2 out of 5 years as your primary residence as of the date of sale, you can still qualify for the exclusion.

[michellefyu]

Thanks for the response. In turbotax, do I report this sale as "Sale of Your Main Home", or check the "property is sold" box in the rental income section? This unit is a rental property while sold, and I do own and live in another home for 2 years.

In turbo tax:

Sale of Your Main Home
In this section we'll record the sale of your main home, your principal residence where you spend most of your time. This does not include the sale of a vacation home or a second home. You'll report that in the investments section.

The wording confuses me because the rental home is NOT my principal residence the year is it sold. Can I still report the sale in this section?

[Coleen3]

If it was rented in the year 2018, you would enter everything through the rental section. If not, Sale of your Main Home.

[michellefyu]

The property was used as primary residence 2014 through 2017 (3 yrs) and rental property 2017 through 2019 (2 yrs). If I sell in 2019, can I report it as “sale of main home” when it is actually a rental property in 2019? Turbo tax suggests that if it is a rental property at the year of sale then I should report it as rental property sale (which would not qualify for the the tax exemption). However the tax law makes it sound like the home could be considered as “main home” if it was a main home 2 years out of 5 years even it is a rental property at the time of sale. In which section should I be reporting the sale, under "sale of main home" or "rental property"??

[Coleen3]

There is a screen in the rental section that asks if you lived in the home and allows you to take the exclusion. There is also a screen in the sale of main home that allows you to enter your depreciation. What matters is whether it was rented in the year you are doing taxes. If you say it was not rented in the program, you will not be able to enter the rental section at all. Keep track of your depreciation should you need to enter it manually.

[Morrisecat]

How do I reach the screen in the rental section that asks me if I lived in the rental?  I should qualify for the exclusion because I owned and lived in it 24 months of 5 years before renting it. 

[RobertB4444]

@Morriscat  Please clarify - how long has it been a rental property?  If you have been carrying it as a rental for more than five years on TurboTax then you would not be offered the option to put in that you lived there since TurboTax would have five years of rental information.

[Morrisecat]

Thank you for your reply.  We purchased and lived in it 10/15/15 until converting it to a rental 7/27/18.  Sold 2/22/21.  I understand I'll have to pay tax on the depreciation.  I'm having trouble figuring out how to make TT not create a gain in the Rental section based on selling price over purchase price.

[MarilynG1]

If you sold a Rental Property in 2021, report this in the Rental Section (Property Profile and Assets/Depreciation sections).

Indicate that the property 'was rented all year' (up to sale date). 

The gain is calculated in the Rental Section; however, you may be able exclude all or part of it.  Continue through the section after entering sale info; TurboTax will ask questions about number of days used as 'other than primary home' after a certain date.

When I used a 2018 date as 'date started renting' to recreate your scenario, part of the gain was excluded. 

Click this link for info on How to Report Sale of Rental Property.

[Morrisecat]

Thank you for your reply.  I do not get to a screen where TT asks me number of days.  When I worked through the sale of the rental, the Results screen says I have a gain of $21,299.  The amount is exactly selling price minus selling costs minus basis minus depreciation.  But since it was my primary residence for more a than 2 years, I should be able to exclude the gain per Property (Basis, Sale of Home, etc.) 5 | Internal Revenue Service (irs.gov) But I cannot find the path to do that in TT.  Can you please tell me where to turn to get to that path?  What is the screen that leads to that question? Thank you.

[MarilynG1]

Type 'sale of home' in the Search area, then click on 'Jump to sale of home'.

You will come to a screen asking for 'Adjusted Cost Basis' (amount calculated in Rental section).

The next screen will ask about 'Time You Lived in your Home'.

[Carl]

If you report this sale in the Rental Property section of the program:

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even if it's zero. Then you MUST work through the "Sale of Property/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

[Morrisecat]

I finally made enough turns to get to the correct screen where it asked me to verify we'd lived there.  Turbotax partially excluded the gain, and I think I'm finally all set.  Thank you!!

[geoffa]

I am facing the same issue reported by Morrisecat.  I recently sold a rental property that had previously been my primary residence.  Since I had lived in the property for 2 of the last 5 years, I should qualify for the capital gains exclusion.  When I work through the Sale of Property section under Business: Rental and Royalty, I'm eventually asked if I used the rental property as a personal residence.  However, I'm not asked for the time that I lived in the property, and no exclusion is applied.

I'm using the Home & Business edition of TurboTax for MacOS.  Any help would be greatly appreciated.