Confusion - Did You Use This Home for Anything Other Than Your Primary Home?

[PAC12-buffs1]

I bought my home as my primary residence in 2011. I lived there for one full year then converted it to rental property in 2012 when I got married and moved into my wife's home with her. My property was considered rental for 5 years through 2017. My wife and I divorced and I moved back into my home as my primary residence again in 2018. I'm planning on selling the house and I will meet the 2 out of 5 year use test, so consequently I should qualify for a tax exclusion with the sale. I'll also take into consideration depreciation from the time it was rental property.

In running a mock tax test through the Turbo screens for this, what's confusing to me is the language in the screen that asks "Did You Use This Home for Anything Other Than Your Primary Home?" Well, based on what I've described above I was certainly compelled to answer this as "Yes" until I read the note included  that says "If you used your home for reasons other than your primary residence after it was no longer your primary home, select No." That fits, so now I feel I should check the "No" box. Can anyone who happens to see this, please clarify this for me? Thanks so much!

[Opus 17]

You must answer "yes."  Sorry the help is wrong.  This is a very complicated issue and the IRS doesn't even do a good job explaining it  in their publications.  (I think the last time they tried to explain it was the 2013 version of publication 523).  Essentially, you can't exclude your gain on a rental by moving into it for a short time as your main residence.

You can exclude the gain for periods of "qualified use."  Qualified use includes a period of time after you move out to use it as a rental (as long as you sell within three years), but not if you move back.  It's hard to explain in words, a picture is better.

If you sell after moving out, the time between remains qualified for the exclusion, as long as you meet the 2y/5y rule to qualify for any part of the exclusion.  But if you move back in after you move out, the period of time when the house was not your main residence becomes non-qualified for the exclusion.

Turbotax will calculate your tax correctly even though the rules are hard to find in writing.  Approximately, you have 5 years of qualified ownership (2011-2012 and 2018-2022) out of a total 11 years of ownership, that's 45%.  So after you figure your capital gains, you will pay capital gains tax on 55% of the gain, and you can apply your personal exclusion of $250,000 toward the other 45% of the gain.

You can use months or exact days to calculate the appropriate periods of qualified, non-qualified and total ownership.

And since this was a rental, your calculation becomes even more complicated.   Your capital gains includes the results of depreciation you took or could have taken while the home was a rental.  You pay depreciation recapture on the part of the gain due to depreciation at regular income tax rates, with a maximum of 25%.  Then 55% the rest of the gain is taxed as a long-term capital gain, and 45% of the depreciation is applied against your personal exclusion. 

[PAC12-buffs1]

Thank you so much for the detailed response! You're right, this certainly is complicated, but I very much appreciate you sorting it out for me. I will answer as "Yes", and in doing so when it subsequently asks "How many days was your home used for other purposes?" I'll put in the correct number of days it was considered rental property (non-qualified), and let Turbo Tax do the automatic calculation for me. Thanks again!