Will I pay any capital gains if selling a home purchased in '08 as a primary residence, converted to rental in '09, then converted back to Primary residence since '14?

[bphconsultingllc]

The total gain is approximately $150K, I know I will need to pay depreciation recapture on the portion that was deducted during the rental period, but I am unclear if I need to pay capital gains on the roughly 1/3 remaining gain, proportional to the time it was a rental?

[Carl]

Maybe. There is a period of time after 2008 when it was a rental, which is considered "unqualified use" for the purpose of the exclusion. Based on the data you enter, the program will figure it out appropriately. Probably won't be that much though, if any of your gain is taxed at all.

[Opus 17]

Yes. Roughly speaking, you owned the home for 15 years, of which 6 years are considered non-qualified. That means that 6/15 of your gain is not eligible to be excluded.  (It will be figured to the month or day so it will be more accurate). 

If 150,000 is the total gain including depreciation, you first pay recapture tax on the depreciation (let’s say that was $30,000).  Then out of the remaining 120,000, 6/15th will be taxable and the remaining 9/15ths is eligible for the $250,000 exclusion.  

[taxlady28]

Does TurboTax do a calculation like that?  I have just seen where it asks if it was primary residence for two of the last five years.  I thought if that was true than it was eligible for the entire $250,000.  I do know it asks about the depreciation and does deduct that correctly.  Your answer makes sense and I am just wondering how that would happen in TurboTax.

[TomD8]

@bphconsultingllc --

This IRS Q&A explains the rules:

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/prope...

[Opus 17]

@taxlady28 

The calculation for non-qualified use is included in publication 523, and TurboTax generally follows all the published calculations and worksheets, so I assume this is included.  I haven’t actually tested this situation myself, however.   If I have time tonight, I will try and look.  

[Opus 17]

@TomD8 

That FAQ doesn’t actually cover this situation.  That FAQ discusses the situation in which a taxpayer moves out of their home for a time before selling it. If the taxpayer moves out of their primary home and sells it within three years, that is still considered qualified use. However, if the taxpayer moves out of their home for a few years and then moves back into the home and resumes using it as their main home, the time period when they were out of the home is not qualified.

The IRS used to describe this in publication 523, but they stopped several years ago, and they don’t really address it at all now. However, the calculation is included in worksheet 2 in publication 523.  Because TurboTax follows all of the IRS work sheets, I believe TurboTax will include the calculation correctly, but I haven’t tested it lately.

[Opus 17]

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@taxlady28 wrote:

Does TurboTax do a calculation like that?  I have just seen where it asks if it was primary residence for two of the last five years.  I thought if that was true than it was eligible for the entire $250,000.  I do know it asks about the depreciation and does deduct that correctly.  Your answer makes sense and I am just wondering how that would happen in TurboTax.

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Turbotax doesn't directly do the calculation.  Turbotax will ask you, "did you use the home for anything other than your primary home?"  It also has a link you can click for an explanation.  If you answer "yes" (you used your house for something other than you primary home), you will need to enter the number of day the home was used for something else.  You will have to calculate the number of days yourself, from your own records.  In your case, it is the number of days after 2008 that the home was used as a rental, or used as a second home (not your main home).

Then, Turbotax will ask if you claimed or could have claimed depreciation, such as using the home for business, a home office, or as a rental.  You will have to enter the amount of depreciation that you claimed or could have claimed (even if you didn't actually claim depreciation) from your own tax records, turbotax won't help you come up with the dollar amount.  

The rest of the entry proceeds normally. 

[Mike9241]

not quite how it works. first depreciation up to the amount of gain is recaptured. 

using the above example

the $150 gain is reduced by the $30 depreciation leaving $120

40% - 6/15 of that gain or $48 is allocated to nonqualified use so it is not eligible for the exclusion and is taxed at capital gain rates

the remaining $72 is excludable.  

this is consistent with worksheet 3 in pub 523.

however, your numbers will be different because the depreciation is a guess.

for example, if depreciation was $60 then the remaining gain is $90. 40% or $36 not excludable  

you use the home sale worksheet and will need to enter among other things - in the basis worksheet and elsewhere the depreciation taken for regular tax and AMT tax purposes (should be the same).  also needed 

is the days of nonqualified use. 

[Hal_Al]

Q. Does TurboTax do a calculation like that? 

A. Yes.

Q. I have just seen where it asks if it was primary residence for two of the last five years.  I thought if that was true than it was eligible for the entire $250,000?

A. Yes.  But, if there was non qualified use, the amount of the gain eligible for the $250,000 maximum exclusion is reduce by the fraction described in the other answers.

Q.   I am just wondering how that would happen in TurboTax (TT)?

A.  TT handles this very well (I just tested it, again). It asks you if you qualify for the exclusion (the 2 year rule), then it asks if you had any non-qualified use. If you answer yes, it asks you to enter the number of days (not years or months) of non-qualified use. Then it asks for the depreciation taken (or allowed). It then calculates the excludable amount, the taxable portion, and the depreciation recapture on Schedule D. 

Enter the sale in the home sale part of TT (Less Common Income - Sale of Home).