Capital gain tax Q for 26 U.S. Code 121

[cyberankur]

Hi,
We moved from our primary residence (single family home) where we lived for 3+ years in NY to NJ.

Rented out NY home (Aug 2020) and bought a new home in NJ (new primary residence since 2021).

If we sell NY house, the "profit" from selling house, would obviously entail capital gain tax.

Would that be exempted under '26 U.S. Code § 121 - Exclusion of gain from sale of principal residence' ?

[M-MTax]

Read this IRS publication......https://www.irs.gov/pub/irs-pdf/p523.pdf

Also you will have depreciation recapture because you rented your home.

[Hal_Al]

Simple answer:  If you sell the NY home within three years of the move out date,* you can exclude the capital gain (up to $500K for married couples).  However, you must pay tax on the depreciation you claimed (or should have claimed) while it was a rental.  Depreciation "recapture" is taxed as ordinary income, but no more than 25%.

*You must meet the owned and lived in 2 out of the last 5 years rule.  Selling within 3 years insures you meet that. There are exceptions to the 2/5 rule if your move was work related or other "unforeseen circumstances" See Pub 523