Capital Gains Exclusions

[Jeremy Little]

Hi all, I’m coming to this group because I’ve now gotten different answers from different cpa’s and I figureD this might be the best place to help resolve this or see if I need a third opinion. I’m trying to understand the tax implications of selling a house that used to be my primary but is currently a rental property. My current cpa is stating something that I can’t wrap my head around. We bought a house in April 2015 as our primary, moved out April 2020 and rented it out until August 2021. If we sell right now he is stating that we would not qualify for a full exemption. But if we move back in to it (for even a few months) and sell as our primary it would then qualify. I have read and read the tax code and lots of forums and it’s not making sense to me. Was there a change to the tax code recently that would change all of the examples I see online? Gain would be under the max exemption amount.

He is stating that things changed with the Trump tax code but I can’t find anything about whether this is truly the case. I was thinking if we move back in then we would then have to count the rental period as non-qualified time. I want to trust what my current cpa is stating but I’m just having a hard time wrapping my head around it since it’s the opposite of what I’ve always heard. He says he had to have an irs person explain this to him which seems convincing to me but everyone else doing this wrong just doesn’t seem possible.

He is stating that the piece that changed was the position of the property, if we sell as a rental it goes from the end back and if selling as a primary we get to start at the beginning and go forward.

This is what he sent me:

So if you sell the property ending as a rental, your non-qualified days of the exemption would be 448 out of a possible 730. You are roughly looking at a gain of 170K plus a recapture of $24K in depreciation (total gain of $194K). The 170K in gain is long term and the $24K of depreciation is ordinary income. So based off your 2020 return, your tax liability would be approximately $29K. Make sure when you are running the worksheet that your non-qualified days (the days it was a rental) are counted first. You will be able to see that out of a possible 730 days of exemption…448 are taken up by rental days. That is why if you can end the property as a personal residence…it re-sets the counter and we can include personal residence days first.

Anyone know about this being a new thing? The position of the home being a rental at time of sell making a difference, even though we meet the 2/5 rule and it was a primary first?