Sister & her husband live in separate homes for 3 years & filed separately. Houses are under 2 land trusts. She sold her house in 2025. Can she claim the $250K exemption?

[YT6]

To clarify: when they separated, they put each house under a land trust with only one name so they have no claim to each other's house. They will file separately in 2025 if divorce not finalized by 12/31/25. Her house was sold for a small profit. Just want to see if she can claim the $250K exemption since this house has been her primary residence for 3 years. Thank you

[Mike9241]

She should qualify for the exemption since she meets both 2 out of 5-year rules (ownership and use a principal residence) and apparently has not used the home sale exclusion within 2 years of this sale. 

[YT6]

Thank you!  One more question: House in question was their main home for 15 years until they moved to another house in 2016 and rented it out. They separated & my sister moved back to this house in late 2020.  Is the rental period considered "nonqualified use of main home", or is it exempt because it's their home before and after the rental period? Thank you very much.

[Vanessa A]

Since she did still live in and own the house for 2 out of the last 5 years, she still does qualify for the home sale exclusion.  However, when the house was a rental, it should have been depreciated on their taxes.  Since she is now selling the rental, she will need to recapture the depreciation on the home, meaning add back the depreciation taken as ordinary income. 

As you walk through the questions reporting the sale of the home, you will be asked if the home has ever been used for anything other than the primary home, here you will answer yes.  As you continue through you will be asked about depreciation taken on the home while it was a rental.  This is where you will enter the depreciation for the entire rental period.  You will need old tax returns to find this information and then look at Schedule E from the return to find the amount for each year.