Wife bought a house in June of 2015. We got married and then I bought a house in 2018 so we moved and rented out her old house and then sold it. Aren't the gains exempt?

[srboyan]

Timeline:
My wife purchased a house on 06/05/2015
I bought a house in my name on 05/06/2018
We got married on 05/19/18
We moved to the new house and rented her old house for one year
We sold her old house on 08/31/2019

Since she lived there for more than two of the past five years, shouldn't the gains be exempt? If so, why does TurboTax not factor this in and make me enter the property as a "business"?

Thanks!

[Hal_Al]

Yes, the gain is excludable (up to $250,000).  You do have to pay tax on the depreciation recapture portion.

There are two different places to enter the sale.  I find the interview goes smoother if you enter it as a home sale, rather than sale of rental.

"Depreciation recapture" is required whether you actually claimed depreciation, while you rented it out, or didn't claim it.  If you didn't claim it, you (or she) can file an amended 2018 return to claim it now.