Capital gains question (2-out-of-5-Year Rule)

[Monica Seth]

Thank you in advance forum members. I need clarification on whether the 2-out-of-5-Year Rule would apply in our situation to get full exclusion from capital gains tax.We live in CA and had purchased a condo in Jan 2005. This was our primary residence and we lived there from Jan 2005 until Nov 2017. It was converted it into a rental property from December 2017 - April 2021.Tenant moved out in April. Since tenant lived there for 3 years 5 months ,we are considering moving back into the condo as our primary residence for 5 months and then selling it in October 2021. That way it would be owner occupied for 2 years out of the past 5 years, so we are hoping to get full exclusion on capital gains tax.Is my understanding accurate? Would the 2-out-of-5-Year Rule apply in our situation to get full exclusion from capital gains tax? We don’t own any other primary residence; we are renting a home nearby.

The total depreciation deducted over the 3 years 5 months is $ 28,887. I understand we are liable for depreciation recapture when we sell. Is that a flat 25% or based on our tax bracket?

We are aware of the 1031 exchange and do not want to do an exchange currently.
Thank you!

[Wayne Brooks]

@Monica Seth

No, for a couple of reasons....

1) moving back in for 6 months Still won’t get you to the 2 (24 mo.s) years of the last 5 years (60 mo.s)..you still have that 3 years 4 months (40 mo.) gap in there.

Every month going forward, you lose one month that you lived there before you rented it, as you look back 60 months from your  Sale date....so you can’t meet the rule unless you move back in for 2 years.

2) If you moved back in for 2 whole years, to meet to 2 out of 5 rule, you still won’t get the full exclusion because you met the 2 out of 5 rule After it was a rental. Then your exclusion is pro rated by the number of months it was a rental verses the number of months it was a rental.