2 in 5 year rule with co-renters

[kenmoremmm]

i bought a house in 2006. immediately, i rented out one of the rooms to offset mortgage costs. i reported rental income on tax returns and depreciated the % of the area of the house used as a rental.

in oct 2014, i moved out with my wife to a new house, and now the old house is a 100% renter occupied building. i know there's only 1 month between now and the end of october, but i'm curious if i would still be able to qualify for the 2 in 5 year rule for shielding from cap gains taxes considering that the house has always been a rental, but i was living there with it as my primary residence.

[EarthSurfer]

The core question is definitely for a CPA. You may be able to qualify for the portion of the dwelling that was your primary residence. The magic phrase is a "Section 121 exclusion."

Two things to consider if you are eligible:

1. Depreciation recapture: If you do not use a 1031 like kind exchange to purchase another property, the amount deprecated on the property will be considered normal income, and taxed as normal income.

2. The capital gains exclusion for use as a primary residence is applied proportionally to the time lived in the property. In your case, only about 40% of the capital gains would be subject to the favorable treatment.

My overall thought is you would likely owe a lot more taxes than you expect unless you use a 1031 exchange to purchase another property. I would definitely have a CPA run the numbers.

[Dicey]

Unless you're ready to put the house on the market immediately and price it for a quick sale, that ship may have sailed. Get thee to a CPA today.