Capital Gains

[DarryLavid]

I bought a house 10 years ago. I lived in it as my primary residence for 3.5 years. I then moved to California for work and rented the house out for almost 7 years. I just moved back into the house and plan on selling it after moving back into it for 6 months. Does any of my time living in the house qualify for the capital gains exclusion? 

Here are some more details.

Purchased in 10/2012 for $570,000

Rented the house out from 07/2015  through 08/2022. I plan on living in the house until 02/2023 and list it for ~$900,000.

[Bsch4477]

To qualify for the exclusion you would have to have lived in your home a total of two years out of the last five. You might still be eligible for a partial exclusion of capital gains, however, if:

• you sold because of a change in your employment
• your doctor recommended the move for your health, or
• you're selling it during a divorce or due to other unforeseen circumstances such as a death in the family or multiple births.

[Mike9241]

I doubt you qualify for any partial exclusion.

you waited about 7 years to sell

reg 1.121-3 lists some factors that are taken into account in determining whether the sale qualifies for a partial exclusion

Factors that may be relevant in determining the taxpayer's primary reason for the sale or exchange include (but are not limited to) the extent to which -

(1) The sale or exchange and the circumstances giving rise to the sale or exchange are proximate in time;

(2) The suitability of the property as the taxpayer's principal residence materially changes;

(3) The taxpayer's financial ability to maintain the property is materially impaired;

(4) The taxpayer uses the property as the taxpayer's residence during the period of the taxpayer's ownership of the property;

(5) The circumstances giving rise to the sale or exchange are not reasonably foreseeable when the taxpayer begins using the property as the taxpayer's principal residence; and

(6) The circumstances giving rise to the sale or exchange occur during the period of the taxpayer's ownership and use of the property as the taxpayer's principal residence.

[Carl]

If you don't qualify for an exceptions (I'm guesing you don't, since I'm sure you would have mentioned it otherwise) or if you are not active duty military that had to vacate the property under military PCS orders, then your look back is only five years. You must have lived in the property for at least 2 years (730 days) of the last 5 years (1826 days) you owned the property, counting back from the closing date of the sale.

[fanfare]

Live in the home for 24 months not 6 months.

That inconvenience should be worth the tax relief on $250,000 becoming ineligible

@DarryLavid 

[Carl]

Live in the home for 24 months not 6 months.

While it will definitely help, it may not qualify one for the full exclusion. If the owner is the last occupant to vacate the premises, then you have to figure in the period of "non-qualified use".  See IRS Publication 523 page 13 at https://www.irs.gov/pub/irs-pdf/p523.pdf and read the section for Business or Rental Use of Home.

[tagteam]

@DarryLavid will also have to deal with unrecaptured Section 1250 gain for the period during which the property was used for rental purposes.