Capital gains exemption

[prmr]

Hi, Need some help on my situation.

I bought the home on 09/2017 and it was my primary residence until 12/2020 and rented it from 01/21 to 03/22 and sold it in 03/22. Does my capital gain fully qualify for tax exemption or does it only qualifies for the period i stayed in that home? Can someone please share your experience. 

[Anonymous_]

See https://www.irs.gov/taxtopics/tc701

Since it appears as if you owned and used the home as your main home for the last two out five years leading up to the sale, you should qualify for the Section 121 exclusion (read the information at the link above) in its entirety.

However, there will likely be Section 1250 gain (depreciation recapture) for the depreciation deductions you took (or should have taken) during the time period that the property was used as a rental. TurboTax will make the appropriate calculations for you provided that you enter the property in the Rentals section of the program and indicate it was sold. 

[prmr]

Thank you for your response.

So I end up paying taxes only on the depreciation (for the rental period, in my case 1 year) value when I recapture depreciation and no taxes on the capital gain for rental period?

[Anonymous_]

To simplify this, you would take your total capital gain (noting that the total gain is based upon your adjusted basis, which basis is reduced by your accumulated depreciation) and then the accumulated depreciation is taxed at a different tax rate (0-25% depending upon your other income).

Again, importantly, the program will do the calculations for you.

[prmr]

Appreciate for the simplified response.

[Hal_Al]

I find the interview goes easier if you enter as a home sale, and not the sale of a rental.

In TurboTax (TT), enter at:

- Federal Taxes tab

 - Wages & Income

Scroll down to:

-Less Common Income

     - Sale of Home

The interview will ask if you ever took depreciation.  You get a simple entry to enter the total amount of depreciation claimed (or shoulda been claimed) . 

You should NOT reduce your basis by the accumulated depreciation (depreciation is entered separately). Depreciation recapture is taxed at ordinary income rates (not capital gains rates) but at not more than 25%. 

@Anonymous_  

[Anonymous_]

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@Hal_Al wrote:

You should NOT reduce your basis by the accumulated depreciation (depreciation is entered separately).....

@Anonymous_  

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I understand. My point was, outside of TurboTax, accumulated depreciation reduces cost basis by that amount (i.e., it's part of the calculation to arrive at the adjusted basis).