Why are the capital gains from the sale of my rental not excluded.

[jtansill]

I purchased a home 5-29-2012 for 233,000 and lived there until I began renting from 01-01-2017 until 07-31-2019.  I sold the home 11-01-2019 for 370,000 which I believe meets the exclusion from capital gains however for some reason TurboTax is reporting this a capital gain income.   I've yet to find definitive information on where and how this should be reported in TurboTax and now feel that TurboTax is so jacked up I may need to start another return.   You would think there could be a clear and concise support for such a common event and not have to search YouTube for a how-to.

[Carl]

For starters, the depreciation you took while it was classified as a rental is not exempt from taxes at all. You will pay taxes on the recaptured depreciation *no* *matter* *what*.

TurboTax is reporting this a capital gain income.

Because capital gains is *exactly* what it is. Doesn't mean you paid taxes on it though. Just because it may not be subject to capital gains tax, doesn't change the fact that it *is* a capital gain.

You would think there could be a clear and concise support for such a common event

While it is a common event, even the IRS pubs are not anything even close to "clear and concise" on this.

[jtansill]

Carl, thanks for your response.  My understanding of the exclusion rule is I should only be taxed on the recaptured depreciation ($24,000) and not the capital gains (roughly 130k).   TurboTax is not recognizing this exclusion and lumping the gains in as income.   I've entered the rental income and expenses under Rental Properties and Royalties and reported this years depreciation and indicated that the property was sold.  Also under the Disposition Information see the in-service date 1/1/2017 and entered the 11/1/2019 Date of Sale or Disposition.   From this I would think that TurboTax would see this as an exclusion unless there is some other place in TurboTax that I need to enter.  On my 1040  I see there is a 146k capital gain pulled off Schedule D and under Business Items of Income and Wages there is the 146k under Sale of Business Property.   Is this where TurboTax reports the captial gains and where I need to justify the exclusion ?

[Carl]

TurboTax is not recognizing this exclusion and lumping the gains in as income.

Understand this; It ***IS*** income, and it ***DOES*** add to and get included in your overall AGI. No ifs, ands or buts about it. But it's taxability is another story.

When you started working this sale through the SCH E section of the program, there is a question that asks you if this sale includes the sale of your main home. You will be asked this question for each individual asset listed in the "Sale of Assets/Depreciation" section. You must select YES. Then, and only then will the program work you through additional questions concerning the "lived in 2 of last 5" rules. If you are married filing joint, it will work through the set of questions for you, then the same set of questions for your spouse.

[AmeliesUncle]

Carl, the excluded amount is NOT income and does NOT increase AGI.

But as Carl pointed out, when you go through the rental "assets" to report the sale, you need to indicate it was your main home.  When going through the "asset", do NOT say "yes" on the "Special Handling" screen.  Also, do NOT report it in the "Sale of Business Property" section.