Tax on the Sale of Primary/Rental Home

[nejidoreb123]

Hi,

I lived in my apartment for 4 years then rented it out for almost 3 (Lease ends in Dec2022 and it would hit the 3 year mark)

I plan to sell it this year, it's about $45k of gains. I have to pay 15% federal + 10% to state.

If I move back in right after the 3 year mark for a couple months until the sale can I exclude all capital gains or is it prorated?

Or should I not move in and try to sell it before the 3 year mark if I want to avoid tax on gains?

[NCperson]

@nejidoreb123 - the simple rule is to avoid the capital gains tax is you must have lived in the residence for 2 of the last 5 years.  they don't have to be consecutive months or years,  but it does have to add up to 730 nights (2 years) living in the residence. 

but this is a little more complicated because you rented it out for 3 years.  Did you declare the rent as income? did you depreciate the property during those 3 years? 

[Mike9241]

if it was an arm's length rental (special rule applies for rental to friends or relatives) then you should have taken depreciation and reported the rental on schedule E.  under the tax laws any gain attributable to depreciation taken or allowed, if not taken, must be recaptured as income before the home sale exclusion applies. if yo did not take depreciation when you were allowed see a tax pro for doing your 2022 return (if that's the year you close on the sale of the property) form 3115 would be required and it is not an easy form to complete.

[Carl]

If I move back in right after the 3 year mark for a couple months until the sale can I exclude all capital gains or is it prorated?

Depends. If you the owner are the last to move out of the property as your primary residence prior to the sale, then your exclusion is prorated based on "unqualified use" .

Many individuals abused the tax-benefit provisions by converting their rental or investment properties into principal residences and then selling them after meeting the use requirements. By doing so they were excluding the entire gain amount up to $250,000 (or $500,000 for married individuals filing joint returns).
To stop this practice, Congress added a new rule on non-qualified use of principal residence when it passed the “Housing and Economic Recovery Act of 2008.”6 Now, an individual cannot exclude the portion of gain which belongs to non-qualified use of principal residence from his/her gross income.