Capital Gains Taxes - Was Primary Residence - Moved to job/illness and rented out

[Alec Kirchhoefer]

Considering selling condo - looking for guidance regarding possible tax implications. I am aware of the 2 in 5 rule, and have lived in the residence for 20 of the last 60 months, so just short of meeting the capital gains requirement to deduct up to $250K single/$500K married in gains. However, I understand the tax code allows you to prorate the 2 year time frame for a few various reasons. Namely a job or illness - which I have both. Bought condo in FL August 2017, lived there until June 2020 when I had to move out of state for career reasons. On top of that I was diagnosed with blood cancer in Sept 2021 and continued to live in a different primary residence to be near proper medical care. So the condo has been rented from June 2020 through the end of October 2023 when the current tenants lease expires and move out. I am considering selling the condo due to continually increasing insurance in Florida, HOA, property taxes, and need liquidity to put towards a down payment on a new primary for growing family. Condo purchased for $150,000 in August of 2017 and probably have ~ $210,000 into it after renovations. I'd estimate the current value is around $300,000.

Would the sale be subject to capital gains taxes?  My assumption is no - because of the proration due to job/illness.  I am married so could technically deduct up to 0.83 x $500,000 = $416,666 with prorating the time lived.  However, I am no tax expert and would greatly appreciate further guidance.  https://www.kiplinger.com/taxes/capital-gains-tax/604944/cap...

[Michael Plaks]

@Alec Kirchhoefer

The partial exclusion that you're referring to was designed for a different scenario: selling the property too early, i.e. before one accumulated the necessary two years. In your case, you're selling the property too late, not too early, i.e. after the 3-year "grace period" expired.

My interpretation is that you do NOT qualify.

It is possible that some of my colleagues interpret the rule differently.