Trying to understand capital gains on personal/rental house sale and non qualified use exeptions

[llamabrew34]

This is a bit complicated but I'll try and make it as simple as possible. I purchased a house as my primary residence on 10/1/16. I lived in that house as my primary residence up until 7/1/19. I then had to move for a job change out of state. During that time I rented out the house with the intention of moving back one day. I recently sold that house on 8/15/22. 

So obviously on face value I barely do not qualify for the 2/5 exception to the gains taxes by about a month. I tried very hard to sell it in time but the market shifted this year and it took longer than planned.

However I have read that due to the fact that my move was job-relocation related I may qualify for an exception based on the time I lived in it vs the time it was rented our during the 5 years prior to selling it. So just rough math for the sake of ease that would mean I lived in it approx 22/24 months before the time of sale and since it was due to an exception (job change) I should still qualify for up to 22/24 or ~92% of the 250,000 exception....or around $230,000. Am I reading this situation correctly? 

Thanks!

[Carl]

I have read that due to the fact that my move was job-relocation related I may qualify for an exception based on the time I lived in it vs the time it was rented our during the 5 years prior to selling it.

Using the information you provided, you "may" qualify for a partial exclusion. If so, you can exclude 22/24ths of your gain from being taxed. I'm getting my information from IRS Publication 523 at https://www.irs.gov/pub/irs-pdf/p523.pdf on page 6 of that document. It states:

You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.
Work-Related Move
You meet the requirements for a partial exclusion if any of the following events occurred during your time of ownership and residence in the home.
• You took or were transferred to a new job in a work location at least 50 miles farther from the home than
your old work location. For example, your old work location was 15 miles from the home and your new work
location is 65 miles from the home.
• You had no previous work location and you began a new job at least 50 miles from the home.
• Either of the above is true of your spouse, a co-ownerof the home, or anyone else for whom the home was
 his or her residence.

So if your old job was 15 miles from the house, and your new job is 65 miles or more from the old house, then using your numbers you would qualify for a partial exclusion of 22/24ths of your gain.

When entering this information in the program, it will figure this and "do the math" for you, provided of course, you answer the questions correctly and enter your data accurately.

[Critter-3]

You are reading it correctly  HOWEVER  you will still need to recapture the depreciation you actually took or was allowed to take.   If you did NOT take any depreciation you need to RUN to a local tax pro to get this error corrected or you will pay taxes on the money twice. 

[Carl]

Yes, depreciation recapture is the one thing I forgot to mention. You "WILL" pay taxes on the recaptured depreciation no matter what. Depreciation recapture is "not" included as a part of the "2 of last 5" rule. Recaptured depreciation is taxed depending on your AGI up to a maximum of 25%. So your tax on the recapture could be anywhere from 0% to the max of 25%.

Depending on your gain, that max threshold only helps if you're in the 32% bracket or higher.

[llamabrew34]

Yes I have been taking depreciation during the ~3 years or so I rented it out so that should be fine. And based on the IRS publication provided above (thank you !) it looks like since I lived there for 22 months over the 5 years prior to the time I sold it and the reason I moved and rented was because of a job change over 50 miles way I should be ok on the cap gains front with the 22/24 formula. Thank you for all of your advice! 

[Critter-3]

In the TT program ... you must complete it in this manner :

1) complete the Sch E section first and inticate all the assets were taken out of service/converted to personal use ... do NOT sell them at that point

2) using the Print Center tool ...  print a copy of the depreciation worksheet so you know the total of all the depreciation taken over the years it was a rental

3) sell the property using the home sale section ... this is where you will enter the depreciation taken figure

Click on Federal Taxes (Personal using Home and Business)
Click on Wages and Income (Personal Income using Home and Business)
Click on I'll choose what I work on (if shown)
Scroll down to Less Common Income
On Sale of Home (gain or loss), click the start or update button

Or enter sale of home in the Search box located in the upper right of the program screen. Click on Jump to sale of home