Capital Gains Question

[Jim Adams]

Before anyone says it, yes I have a CPA, he's on it and I'm waiting to hear back, but my realtor is questioning what my CPA's already told me.

Here's the situation: I am under contract to sell my previous primary residence. I bought it in 2012, lived in it until sometime in December 2017, and rented it from Feb 2018-Oct 2020. I thought that by selling it before 3 years from the day I moved out I would avoid all Capital Gains, but my CPA just said that they changed that law a few years ago and now you have to calculate the number of months you lived in it and the number of months you rented it out and pay cap gains on the percentage of months it was a rental. Is this true? My realtor says he's never heard of that, and neither had I. Also, my buyer is trying to push back the close, and we're really close to when we moved out. When will the IRS consider the day the new residence became primary? There's the date I closed on the new home, the date the movers moved us in. The day after that I had a baby and if anyone checked hospital records would probably have the new address. But then we didn't rent it out until Feb, and we were likely very late in changing out driver's licenses and voter reg (we only moved .25 miles away so it didn't change our precinct for voting).

[Dave Foster]

@Jim Adams, Those new prorations are put in to play when you convert an investment property into your primary residence.  If you then later sell you have to do the proration.

If you simply purchased a house, lived in it, and then moved out and rented it you are eligible for the full 121 tax free exemption as long as you have lived in that property for 2 out of the 5 years immediately prior to the sale.  But you will have to recapture depreciation.