cost basis, appreciation and captial gains for a long-term primary home with 1-2 years rental

[roflmao1]

simple question, hopefully simple answer, considering a single tax filer situation:

2000: bought home for $100,000

2018.12.31: home appraised for $250,000

2019.01.01: rented home for 1 year for total income of $12,000

2020: sold home for $250,000

Questions/Scenario:

- if home had been a non-rental, it would qualify for capital gains exclusion

- if home has been a rental for entire 20 years, would have to pay capital gains on $250k-$100k = $150,000

- question: since home was rented for one year and the "basis" at 2019 beginning was the same at which is sold for in 2020, are capital gains calculated on new 2019 basis or the original 2000 sale price/basis. 

the reason for asking this is that it's obvious that the 1-year rental would actually cost the owner more money in capital gains than the 1-year rental income, if the basis is set at the 2000 value. Therefore, it would be dumb to have rented it out for this 1 year. Assuming 15% capital gains:

Scenario1: 15% * (250,000-100,000) = $22,500 capital gains > $12,000 rental income

Scenario2: 15% * (500,000-500,000) = $0 capital gains <$12,000 rental income.

So this question gets to the disingenuity of the IRS: will they allow a personal capital gains appreciation exclusion for the first 19 years since the home wasn't a rental and then only consider capital gains on the last 1 year, in which it was a rental, or do they basically say sorry folks, we want all years of capital gains. Scenario1 seems fundamentally unfair/unjust. But it wouldn't surprise me since working class folks cannot write off their car miles to and from work, while business folks can.

[Mike9241]

if after purchase you used the home as your primary residence until you converted to rental then only the 5 years ending on the date before the sale are relevant. The appraised value is irrelevant. You will qualify for the home sale (gain) exclusion  (HSE) even though the home was rented out as long as it was your primary residence for 2 or more of the 5 years ending on the date of sale. Note that as a rental depreciation should have been taken, that is not eligible for the HSE. if you did not take depreciation run to a tax pro because even if you didn't you must pay income taxes on the amount you should have taken. .

if it was not used as your principal residence after purchase then there is nonqualified use that will change the results. only periods after 2008 are counted in determining nonqualified use.

for example assume full years

2000-2010 used as a vacation home (Non qualified use only 2009 and 2010)

2011-2018 used as a primary residence

2019-2019 rental

2020 empty sold 12/31

years of nonqualified use 2

years of ownership 21

2/21 of any gain would not qualify for the HE

[roflmao1]

thank you mike, regarding non-qualified use, it looks like the IRS treats appreciation on capital from the time in which it was purchased. so even if all gain was made during periods of qualified use, (lets say years 0-19 were gain years and you lived there), and lets say the property lost value for the 2 years of rental (years 20-21), you cannot take a loss on capital, but must prorate the gain as such:

2 / x, where x = the total number of years you had the home. or 2 / 21 * 21 year appreciation.

I was thinking you could get a appraisal on the property at the time of first rental use (year 19) and then gains either accumulated or went down from there (year 21 valuation - year 19 basis), rather than be pro-rated over the life of the ownership (year 21 valuation - year 0 basis).