Should I owe Capital Gains Taxes if I lived in the house 3 years then leased 2 years?

[Sergio Rodriguez]

Hello Friends, 

I purchased a house in 2017 and lived there for 4 years as my homestead's primary residence. Following that we moved out and turned it into a short-term vacation rental around April 2021 and the last year before we sold the house in December 2022, we leased it out as a long-term rental for 1-year. My tax specialist is telling me I owe about $16k in capital gains tax because I had converted the house for commercial use. However, the house was still under our name and not converted into our LLC.

Overall, I expected to pay no capital gains tax seeing as how we lived in the house 4 years out of the +5 years I owned it. I reviewed the IRS publication 523 for additional guidance but it's not clear to me (non-tax fellow) if I am exempted from capital gains. Any guidance will help!

Timeline of events: 

2017 March - Purchased house as the primary residence

2021 May - House used as Airbnb

2022 November - 1-year Lease Expired 

2022 Dec - Sold House

[Sean O'Keefe]

@Matt Devincenzo I agree - Section 121 Exclusion applies in this case. 

@Sergio Rodriguez your CPA mentioned is likely the Depreciation Recapture but we'd need more details to be certain. 

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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.