Is Capital Gains Tax Home Exclusion Prorated if you Rent it for 1 year?

[andysandp]

From what I read you can get a Capital Gains Home Exclusion of up to $250,000 (single) if you live in the your Primary Residence 2 out of the last 5 years.

Do I get the full $250,000 Exclusion if I rented my Home the final year?

For Example:

Paid $400,000 for the Home in 1/1/2013
Sold it for $600,000 1/1/18

Lived in it from 1/1/2013- 1/1/17
Rented it from 1/1/2017-/1/1/2018

To simplify let's assume no Agent Fees, Closing Costs, Improvements or Repairs.

My Capital Gains is $200,000.  Do I pay 0 Capital Gains Tax or is it prorated because I rented it for 1 year?

Thanks for any help!

[seattlecyclone]

If you lived in it for two of the past five years, what happened the other three years is irrelevant. You still get to claim the full exclusion even if it was a rental for part of that time.

[andysandp]

Thanks Seattlecyclone!

So what if I decide to rent it out for 5 years, instead of 1 year.  Then I move back into the unit for another 2 years and sell it.

Bought it 1/1/2013

Rented it from 1/1/2017-1/1/2022
Move back in 1/1/2022-1/1/2024.

This shows I still lived in the unit 2 out of the last 5 years.  Do I still get the full Exclusion (up to $250,000)?  Or is it prorated because I rented it for 5 years?

This is the part that confuses me.

Thanks!

[seattlecyclone]

You get the full exclusion if you lived in it for two of the past five years. Doesn't matter which two of the five years. What happened six or seven years ago is completely irrelevant.

Note that depreciation recapture may apply to any property that you rented. This is a separate issue from the capital gains exclusion for your primary residence.

[andysandp]

This article said that's not true.  The years that I rent it would be considered "non qualifying use".

So I wouldn't get the full Residential Exemption.  It would be prorated depending on how many years you rent it.   Unless this article is wrong?

https://www.kitces.com/blog/limits-to-converting-rental-property-into-a-primary-residence-to-plan-for-irc-section-121-capital-gains-exclusion/

[walkwalkwalk]

Reading the article and IRC 121(b)(4) I would think it wouldn't matter if you rented it or it was vacant. Just that it wasn't your primary residence.

Just sell it when you're done if you want the exclusion.

[bacchi]

This article said that's not true.  The years that I rent it would be considered "non qualifying use".

So I wouldn't get the full Residential Exemption.  It would be prorated depending on how many years you rent it.   Unless this article is wrong?

https://www.kitces.com/blog/limits-to-converting-rental-property-into-a-primary-residence-to-plan-for-irc-section-121-capital-gains-exclusion/

A primary residence made into a rental doesn't automatically create non-qualified use. A rental made into a primary residence will always have non-qualified use.

[AnEDO]

From the article you linked:

"Fortunately, while the rules do limit the exclusion of capital gains attributable to periods of nonqualifying use (after 2009) in the case of a rental property converted to a primary residence, the rules are more flexible in the other direction, where a primary residence is converted into a rental property. IRC section 121(b)(4)(C)(ii)(I) allows taxpayers to ignore any nonqualifying use that occurs after the last date the property was used as a primary residence, though the 2-of-5 ownership-and-use tests must still be satisfied."

I actually did not know this until this thread and am in this exact position so thanks to everyone for sharing their knowledge.

[seattlecyclone]

I was also not aware. Thanks for the correction. Sounds like if you move out of your primary residence for three years and then sell it, you get the full exclusion, but you have to prorate it if you rent it out for three years and then move in for two?

[andysandp]

I'm still confused.  So in my original Post, I lived in my Home for the first 4 years, and only rented out my Home for 1 year before I sell it.

So this means the last year was a Rental and considered "non-qualifying use"? 

"The new rules, enshrined in IRC Section 121(b)(4), stipulate that the capital gains exclusion is specifically available only for periods during which the property was actually used as a primary residence; any other time (since January 1st, 2009) that the property was not used as a primary residence is deemed “nonqualifying use”."

So that means my Capital Gains Tax is prorated because I only lived has 4 years of qualifying use?  ($200,000 Profit means only $160,000 gets the Tax Exclusion)

So confusing...

[tralfamadorian]

Scenario 1: You live in the home for 2+ years. Then the house is not used as a primary residence (either empty or rented) for =<3 years. You are able to take the full 121 exclusion up to $250k/$500k S/MFJ.

Scenario 2: You live in the home for 2 years. Then the house is not used as a primary residence (either empty or rented) for 3 years. Then you move back in for 1 year. The depreciation taken during the three years of non-qualified use have to be paid back and you can only take half (3/6) of the gains.