All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

Reply
Trusted Pioneer
Posts: 8
Registered: ‎04-20-2016

Capital gains exclusion on sale of primary residence turned rental, Maximum Exclusion or NOT?

I purchased a property in 2003 and it was my primary residence for 10 years (2003 to mid 2013). It later became a rental property from mid 2013 to 2015 (for approx. 2.5 years) and sold it in Feb. 2016. This is the only property I have ever sold.

 

When I fill the home sale questionaire in the tax software, it says I don't qualify for the full 250K exclusion, just partial exclusion. For the period when the property was a rental (2.5 yrs) it is being treated as unqualified usage so I am being charged capital gains tax for that time period = (2.5 yrs rental /12 yrs owned) x realized gain.

 

Since the rental period occurred after primary residency and within the 5 year lookback, shouldn't that 2.5 yr rental period be considered "qualified usage"?

 

My guess is that the tax software isn't taking into consideration the exceptions to nonqualfied usage.

 

Am I  correct to say that I should be eligible for the maximum exclusion?

 

Here is article from the CPA journal I am getting this info from regarding exceptions to nonqualified use (discussed near the end of the article).  

 

http://www.moneyradio.org/www/pdf/3092.pdf

 

Exceptions IRC section 121(b)(4)(5)(c)(ii) provides the following three exceptions relating to the determination of periods of "nonqualified use": * any portion of the five-year look-back period that ends after the last date that the homeowner uses the property as a principal residence; * any period, up to an aggregate of 10 years, that the taxpayer or the taxpayer's spouse is serving on extended military duty; and * temporary absences due to change of employment, health conditions, or other unforeseen circumstances. 

 

 

Tax Pro
Posts: 5,780
Registered: ‎02-23-2016

Re: Capital gains exclusion on sale of primary residence turned rental, Maximum Exclusion or NOT?

Hi kpf510,

 

Welcome to the H&R Block community.

 

You are eligible for the maximum exclusion, however, the maximum exclusion allowed is the max exclusion amount less your recaptured depreciation.  You are subject to capital gains tax on the recaptured depreciation (you must recapture all allowable depreciation) from the rental years no matter what so that's where the tax is coming from.  This is all figured on Form 4797.

 

Louis,

Senior Tax Advisor (Tampa, FL)

Trusted Pioneer
Posts: 8
Registered: ‎04-20-2016

Re: Capital gains exclusion on sale of primary residence turned rental, Maximum Exclusion or NOT?

Louis,

 

Thanks for the response.

 

The property was my primary residence for 10 years, then rental for 2.5 years, then sold in 2016.    In HR Block Premier, there are 2 options for reporting the sale, as "sale of main home" or sale of "business/rental  property", which one do I choose?

Valued Pioneer
Posts: 4
Registered: ‎11-28-2017

Re: Capital gains exclusion on sale of primary residence turned rental, Maximum Exclusion or NOT?

Hi kfp510.

 

I'm facing a similar issue to what you described and what appears to be issues with the software. It's been driving me a bit crazy.  For anyone else I posted some relevant threads below.

 

I saw your postings after submitting my own today: 

http://community.hrblock.com/t5/DIY-Products/sale-of-home-calculating-taxable-gain-H-amp-R-Block-Pre...

 

And your other post:

http://community.hrblock.com/t5/All-Things-Tax/Capital-gains-exclusion-on-sale-of-primary-residence-...

 

I'm reasonably confident now that contrary to the software, I do qualify for the full exclusion. And to answer your question about 'sale of home' vs sale of 'business/rental property' I saw LouisH response in this thread saying it should be sale of business property:

http://community.hrblock.com/t5/Your-Life/Sold-Rental-House/m-p/82429/highlight/true#M4883

 

"The rule is that this has to be reported as a sale of the rental property, and not the sale of your home.  However, if you meet the requirements you can exclude the gain on the sale.  You will, however, need to recapture any depreciation allowed or allowable (regardless if you claimed it or not), as capital gains income, and pay taxes on that amount."

 

I think I will be hiring a tax professional given the complexities, but am very hopeful of getting the full exclusion (minus depreciation). I'd be curious to hear what you ended up doing to resolve this, though. 

 

 

 

 

Highlighted
Trusted Pioneer
Posts: 8
Registered: ‎04-20-2016

Re: Capital gains exclusion on sale of primary residence turned rental, Maximum Exclusion or NOT?

I ended up paying a tax professional to do my taxes that year.  He filled out the proper forms for me to be eligible to exclude the entire gain.  I did have to pay taxes on depreciation taken though.    Tax preparer explained to me that the tax software isn't designed to deal complex situations.   Good luck!