Primary to Rental to Primary Tax Implications

[Robert Wong]

Hi, 

I'm looking for clarification on the following scenario:

I buy and live in a house as my primary residence for 2 years. Then, I convert it to a rental for the next 5 years. Finally, I decide to return and change the rental back to my primary residence for 2 more years. I subsequently sell the house and have capital gains of $100K. 

Under this scenario, am I exempt from paying capital gains tax on the $100K? Or would I have to pro-rate it based on number qualified vs non-qualified use? 

[Lauren Speidel]

@Robert Wong If you move back into your rental and convert it to a primary residence and live there for at least two years you will be able to qualify for the 121 Exclusion. The Exclusion allows you to sell your primary residence and exclude from gross income up to $250k for a single taxpayer and $500k for a married couple. You must have owned and lived in the property as your primary for at least a total of 24 months out of the last 60 months. Since the previous three years were a rental the Exclusion will be prorated. The proration is calculated based on the number of years the property was used as your primary.  Therefore, the longer you use that property as a primary the more exclusion you will receive.