Tax question - How to claim the Section 121 Exclusion

[Pixelshot]

Hi All, hope you're all safe out there!

I have a unique tax situation that I can't figure out. Any help would be much appreciated.

My wife and I owned a home (here in Colorado) and lived in it for 22 months before we moved out to get my son into a different school which was better able to accommodate a disability. We feel that this should count under the section 121 exclusion for capital gains tax. We then rented the house for 2 years and sold it in early 2019. On our taxes, I have logged the sale on the appropriate forms (as a rental investment property) but it now shows a full charge of the capital gain taxes on the house sale. The problem is that I don't know HOW to tell the IRS (via TaxAct) that I am claiming the 121 exclusion. I think it would be the same method if we had lived in the home for over two years, but I don't know how to show that either.

Any suggestions?

[secondcor521]

It seems like you realize that the 22 months you owned doesn't qualify for the 24 months out of the last 60 rule.  You could conceivably argue that the "unforseen circumstances" exception applies to you.

According to the following link, if you qualify for the Section 121 exclusion to exclude the entire gain and some other conditions are met, the way to do what you want is to simply not report the sale.  Obviously keep good records in case the IRS visits.

https://www.irs.gov/publications/p523#en_US_2019_publink100011875

Otherwise, if you are required to report the sale, you can use an adjustment code of H to exclude the gain.  See the following from the IRS instructions for Schedule D:

"If you had a gain and can exclude part or all of it, enter “H” in column (f) of Form 8949. Enter the exclusion as a negative number (in parentheses) in column (g) of Form 8949. See the instructions for Form 8949, columns (f), (g), and (h). Complete all columns."

-Rightmost column of page D-3 from https://www.irs.gov/pub/irs-pdf/i1040sd.pdf

[Pixelshot]

Wow. thanks. I'll give that a shot.

It's likely that I have to report the sale so that I can identify the expenses for the rental unit. However, maybe I just say I haven't sold it. The problem there is that it needs the date of sale to pro-rate the amount of allowable depreciation (Schedule E) for the property for 2019.

[secondcor521]

Wow. thanks. I'll give that a shot.

It's likely that I have to report the sale so that I can identify the expenses for the rental unit. However, maybe I just say I haven't sold it. The problem there is that it needs the date of sale to pro-rate the amount of allowable depreciation (Schedule E) for the property for 2019.

You should never need to misstate things on your tax return in order to get the correct result.  If I were you I'd look into reporting the sale and using adjustment code H to erase the capital gain.  That way your depreciation would also work correctly.