Partial 121 Exclusion for Primary-Rental-Primary Residence

[Andy Huynh]

If I buy a place and live in it for 18 months, rent it out for 6 months, and then live in it for another 6 months before selling, would the full gain (under $250k) be eligible for exclusion or would I need to take a partial exclusion?

[Logan Allec]

@Andy Huynh Why did you move out and rent it out for 6 months?

@Natalie Kolodij  Wouldn't the 6-month rental period be considered "nonqualified use" under IRC §121(b)(5)(C)(i) apart from proving that it qualifies for an exception under IRC §121(b)(5)(C)(ii) and therefore under IRC §121(b)(5)(A) the exclusion would not apply to the portion of the gain allocated to this period under IRC §121(b)(5)(B)?

IRC §121(b)(5)(C)(i) states that the term "period of nonqualified use" means any period (except before 1/1/2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer's spouse or former spouse.

There is an exception in IRC §121(b)(5)(C)(ii)(I) whereby otherwise nonqualified use would not include any period after the last date that the property is used as the principal residence of the taxpayer or the taxpayer's spouse.  But that wouldn't include Andy's 6-month rental period because he in fact lived in it again after the 6-month rental period.

There is an exception in IRC §121(b)(5)(C)(ii)(II) for being on "qualified official extended duty."  If this applies, then Andy, I salute you!

And of course there is an exception in IRC §121(b)(5)(C)(ii)(III) if Andy had moved out for those 6 months "due to change of employment, health conditions, or such other unforeseen circumstances."

So I think that more information is needed, i.e., why did Andy rent it out for 6 months? so that one may determine whether he qualifies for the last two exceptions mentioned above.

Otherwise, I believe he may only be eligible for a partial exclusion.

Thoughts?