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The bottom line is this. To qualify for the capital gains exception, you must have lived in it for 2 of the last five years, counting backwards from the closing date on the HUD-1 statement you will receive at the closing when you sell it. What you can do is select the option for 2 of last 5. The program will ask you for days lived in, in the last 1826 days prior to the closing date. If you qualify for exceptions that allow pro-rating, the program will know "BASED ON THE DATA YOU PHYSICALY ENTER". If you don't qualify, you don't qualify.
There are exceptions for active duty military who are moved under orders. But those exceptions allow for extension of the 5 year rule, and not for a reduction of the two year rule.
You will owe tax on the capital gains, which is not the same as the cash you get out.
Your capital gains is the difference between the adjusted cost basis and the net selling price.
The net selling price is the actual selling price minus transfer taxes, other legal fees, real estate commission, and buyer's closing costs if you pay them. (Minor pre-sale repairs and staging costs don't count, unfortunately.)
The adjusted cost basis is the price you paid, plus certain closing costs that were part of the original purchase, plus the cost of any permanent improvements you made to the property over the years, and minus any depreciation you took or could have taken when you were renting it out, and minus any casualty loss you may have claimed.
The depreciation recapture is taxed at 25% and the rest of the gain is taxed at the 15% rate for long term capital gains (for most taxpayers).
Considering the tax cost of selling after the deadline, you might want to drop your listing price to get an earlier sale, or offer to pay closing costs. Ask your real estate agent how to get a quicker sale with this in mind.
Thank you very much! How about the suspended loss carried forward during rental period (mainly from depreciation). Can it be used to offset gain from selling?
I assume if it already meets 2 out of 5 year rule then it is a moot point because given the 250k/500k exclusion, no tax due anyway.
What if it does not meet 2 out of 5 year rule? Is the sale treated the same as a sale of investment property from Day 1. In that case can suspended loss be used to offset gain?
Is it one or the other? Either benefit from 250k/500k exclusion, or offsetting suspended loss from gain?
Thank you again!
You can use both. The suspended Passive Losses will show up as an "ordinary" deduction on Schedule E. Just be sure to indicate that house was sold in the INTRODUCTORY part of the rental section, as that is what releases the Passive Loss carryover.
Thank you.
How can I report such sale in turbo tax correctly in order to reflect this was a primary converted to rental? Where can I indicate it is within 2 out of 5 years or turbo tax knows how to calculate automatically?
How can I find the exact date use to calculate the 2 out of 5 years from prior tax return or with in turbo tax?
Assuming the Fair Market Value of the home was MORE than your Basis (cost) when it was converted to a rental, just report the sale in the rental section. It will ask you if it was formerly your Principal Residence, and then just answer the followup questions.
Here's the simplified guidance again, that covers reporting the sale in the SCH E section of the program.
The "2 of last 5" look back starts from the closing date of the sale.
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 2019". Select it. After you select the "I sold or otherwise disposed of this property in 2019" 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 it it's zero. Then you MUST work through the "Sale of Assets/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. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1
Basically, when working through an asset you select the option for "I stopped using this asset in 2019" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.
When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.
Really appreciate it! Follow up question regarding:
"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...Basically, when working through an asset you select the option for "I stopped using this asset in 2019" and go from there. Note that you MUST do this for EACH AND EVERY asset listed."
In Schedule E, there are 2 condo property listed under A and B. Only B is sold. Do I have to allocate anything to A if A is not yet sold?
Thanks again.
In Schedule E,
Get off the forms mode train. In the program you work through one single property at a time. It's impossible to do otherwise. You're only working through the assets/depreciation section (which if you've done things correctly, that section is actually name "Sale of Assets/Depreciation) and reporting all listed assets as sold.
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