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Trice83
Level 1

Trying to understand the Property Sales Gains Tax Exclusion and Exemptions

Hello There Knowledgeable Folks!

 

Per my stated subject, I am hoping to find some clarity surrounding the property tax exclusions and exemptions and how I am truly impacted.  

 

Here is some background on my recent home sale.

 

1) Originally purchased the home in 2009 as my primary residence.

 

2) I moved out of the home in 2014 from GA to MA into an apartment rental in 2014, because of a change in my place of employment (which falls under unforeseen circumstances).

 

3) Due to market conditions, selling my home at that time would have resulted in a loss and  leaving me owing more than $20K , so my home was rented out to ensure I could make the mortgage payments.

 

4) I rented my home from 2014 - 2020.  --->>> Which puts outside of the 2 and 5 window.

 

5) I sold my home which had gains due to changes in my employment (which falls under unforeseen circumstances).  Due to impacts from the COVID-19 pandemic, I was furloughed and began receiving unemployment benefits and was eventually notified of my job elimination prior to closing on the sale of my home.

 

6)  I didn't receive any tax related forms related to the sale of the home.

 

I am here because I had read various interpretations of the few exceptions of the Property Sales Gains Exclusion rules.  I believe based on reading the rules that I qualify for the exemption and should be able to benefit from the sale of my home.  I am just really trying to understand.  I am still unemployed and receiving benefits and now, I am without a permanent residence.  I really can't afford this financial hit, but I need to know.

 

Here where the exceptions to the 2/5 rule.

 

To qualify for a full exclusion, you generally must own your home for at least two years during the five-year period prior to the date of sale. There are a few exceptions, however.

1. If you had postponed gain on the home you sold under the old "rollover" rules, enter here the purchase date of the earlier home which you "rolled into" this home. If you had rolled over more than one, enter the date of the earliest purchase in the series. Once you have a date more than two years prior to your current sale, though, there will be no tax consequence of entering an earlier date.

2. If your spouse died and had owned the property longer than you, enter here the date your spouse purchased the property if your spouse also lived in it as his or her main home during that period.

3. If your spouse transferred the property to you (or if your former spouse transferred the property to you incident to divorce), enter the date your spouse (or former spouse) purchased the property.

4. If a prior home was destroyed or condemned and the basis of the home you sold depended on the basis of that prior home, enter the date you purchased the prior home.

5. You sold the home due to unforeseen circumstances. These can apply to you, your spouse, or anyone else living in the home. Unforeseen circumstances include:

 - Change of health
 - Death, divorce, or legal separation
 - Multiple births (twins, triplets, etc.)
 - Change in place (more than 50 miles) of employment
 - Receiving unemployment benefits
 - Change in employment leaving you unable to pay mortgage or basic living expenses
 - Military or foreign service
 - Natural or man-made disaster
 - Act of war or terrorism
 - Condemnation, seizure, or other involuntary conversion
 - Other unforeseen circumstances

Active-duty military and foreign service members may be able to look back over a period of time greater than five years. You can read about this exception.

For further information and examples, see IRS Publication 523, Selling Your Home.

 

Thanks for your feedback!

1 Best answer

Accepted Solutions
gloriah5200
Expert Alumni

Trying to understand the Property Sales Gains Tax Exclusion and Exemptions

You will qualify to show the house sold as a principal residence, but will have to adjust the amount you qualify to exclude due to the nonqualified use period when it was a rental and depreciation was allowed or allowable.

 

Since you rented your home before selling it, then you cannot exclude the gain on the portion of the time the home was a rental property and depreciation was allowed or allowable on your return.

 

You will have to calculate the amount of depreciation that should be recaptured due to rental use (depreciation) part of the holding period explained in IRS Pub 523.  

 

Please refer to the following for additional information on the reduction in the amount of exclusion you qualify to use on the sale of your home due to the "nonqualified use period":

 

IRS Pub 523 starting on page 11.

 

Recapturing Depreciation-

If you used all or part of your home for business or rental (nonqualified use period) after May 6, 1997, you may need to pay back (“recapture”) some or all of the depreciation you were entitled to take on your property. “Recapturing” depreciation means you must include it as ordinary income on your tax return from IRS Pub 523.

 

For additional information on the reduced exclusion of gain on the sale of the house due to "nonqualified use period" refer to the following link:

sale of home worksheet with depreciation rental adjusts

View solution in original post

3 Replies
MikeinSC
Level 4

Trying to understand the Property Sales Gains Tax Exclusion and Exemptions

I believe the key question will be "were you living in the home?"  It is my understanding the exceptions apply only to your personal residence.

gloriah5200
Expert Alumni

Trying to understand the Property Sales Gains Tax Exclusion and Exemptions

You will qualify to show the house sold as a principal residence, but will have to adjust the amount you qualify to exclude due to the nonqualified use period when it was a rental and depreciation was allowed or allowable.

 

Since you rented your home before selling it, then you cannot exclude the gain on the portion of the time the home was a rental property and depreciation was allowed or allowable on your return.

 

You will have to calculate the amount of depreciation that should be recaptured due to rental use (depreciation) part of the holding period explained in IRS Pub 523.  

 

Please refer to the following for additional information on the reduction in the amount of exclusion you qualify to use on the sale of your home due to the "nonqualified use period":

 

IRS Pub 523 starting on page 11.

 

Recapturing Depreciation-

If you used all or part of your home for business or rental (nonqualified use period) after May 6, 1997, you may need to pay back (“recapture”) some or all of the depreciation you were entitled to take on your property. “Recapturing” depreciation means you must include it as ordinary income on your tax return from IRS Pub 523.

 

For additional information on the reduced exclusion of gain on the sale of the house due to "nonqualified use period" refer to the following link:

sale of home worksheet with depreciation rental adjusts

View solution in original post

Trice83
Level 1

Trying to understand the Property Sales Gains Tax Exclusion and Exemptions

Thank you.  I will work with one of the live agents on this when processing as this just stepped into another level beyond my understanding.  But this response did help me some.  Thanks.

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