Your Life

Your Life

Major life milestones often have a major tax impact. Changes in your marital status, having a baby or adopting a child can have significant impact on your taxes. This is the place to ask questions about dependents, real estate, and other various scenarios that play a significant role in what taxes you pay.

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Pioneer
Posts: 1
Registered: ‎04-16-2018

Sold rental, section 121 exclusion?

Hello!

I owned a home from September 2011 through December 2017. From November 2015-November 2017, I rented it out while we lived in our primary residence. I sold the rental in December 2017. I know I have to pay capital gains taxes. However, from what I understand I should only have to pay a portion because I only rented it out for 2 of the last 5 years. However, in the HR Block software, I cannot figure out if that has been factored in. Where in the form would that be?  It seems like that would hopefully save me a significant amount of taxes I owe.  I saw something about a section 121 exclusion online but not sure if I am eligible- or how to capture that in my tax forms.  (I am using HR Block Premium).  Thanks!

Associate (Pioneer)
Posts: 84
Registered: ‎11-25-2014

Re: Sold rental, section 121 exclusion?

Hello,  You have an interesting situation going on and I hope I can explain it clearly to you.  The section 121 exclusion does apply in your situation.  This states that if you owned and lived in a home 2 of the last 5 years, you can omit as income up to 250,000 of the profit (as a single person) and 500,000 (as a married couple).  This is determined by comparing your purchase price plus improvements and closing costs to the sales price.  If that criteria is met, then you will meet the 121 exclusion.  When the property became a rental, then other factors come in to play.  As you were reporting your rental income over the years 2015 to 2017, you were depreciating your home.  (Deducting a portion of the cost each month to reduce your income from the rental.).  Tax laws read as such that even if you didn't take that deduction, when the property is sold, you must account for the amount that was allowed or allowable and have that amount treated differently.  Form 4797 is used to report this type of transaction.  This information is known as a Unrecaptured section 1250 gain.  There is a maximum tax rate for this type of income at 25%.  The balance of any gain then falls under section 121 and can be exempt from tax.  I have not used the online software to accomplish such a transaction, however, most times if you carefully answer the questions, you will generate the form 4797.  Were you taking depreciation during the time of rental activity?  You should input a few figures: Date of beginning to rent the property; the fair market value of the home at that time; the cost of the land it sits on, etc; and the system should calculate what depreciation would be considered.  Please let me know if I can further assist you.