Selling home-capitap gains

[RES47810]

I bought a house in June 2015. I have seen the rule of living in a house for 2 out of the last 5 years rule before. In my case, I lived there until July 2020. It has been rented out since. If I were to sell, would I be able to avoid gains tax by selling at the latest December 31 of 2023? Or would I get taxed on gains on any sale after July? 

[NateTheGrEAt]

Hi @RES47810 - thanks for your question!

The five-year lookback period starts on the date that the property is sold, So, you are correct, to qualify for the exclusion you would have to sell the property before July 2023 in order to have two years of use as your principal residence within the five-year period. 

Also, be aware that although you will not have any capital gains tax on the first $500,000 of gain if you qualify for the exclusion, you will be taxed on the unrecaptured Section 1250 gain due to the depreciation you claimed after you converted the property to a rental. The Section 121 exclusion (also known as the "home sale exclusion") does not apply to Unrecaptured Section 1250 gain. The only way to defer tax on this gain would be to complete a 1031 exchange, but this is a complex topic beyond the scope of your original question, and it might not work for what you want to do as it requires you to reinvest all the proceeds in additional real estate.

I hope this information is helpful!

[RES47810]

That was helpful, thanks. I bought the house at $130000, and it might sell for $250,000. What would be the standard %capital gains tax amount on a $120,000 gain if after July 2023?

[NateTheGrEAt]

It depends on the total amount of your income including the capital gain amount. 

The capital gain portion will be taxed at either 15% or 20% depending on your filing status and total income.

The portion that is unrecaptured 1250 gain will be taxed at 25% or your marginal tax rate, whichever is lower.

Here's a good IRS chart on these calculations.