​Will I owe capital gains tax if I move back and sell?

[Jack B.]

I don’t think I would, but for some reason the IRS’ web sites example claims that I would, despite it conflicting with several CPA articles that I've read that state otherwise. I thought that as long as I lived in the house for 2 of the last 5 years before the sale, especially if I lived it in first, that the gains fall under the section 121 exclusion except for depreciation recapture?

My Situation:

Bought this house August 15th, 2014 and lived in it until end of February 2016 at which point I listed it for rent and it eventually rented it out in late April 2016.

I’ve had it rented from April 2016 (but listed as a rental from March 2016) until now, so just one month under 3 years of having it LISTED as a rental, or 2.5 months short of actual occupancy with a tenant (irrelevant since it was listed as a rental March 1st 2016 as I understand it). 

I am considering moving back into the house in March 2019, live in it for 1 year, then sell. The reason I want to live in it for a year is because I just used my section 121 primary residence exclusion in April 2018 so I will have to wait a bit to use it again.

Questions:

1. If I move back into it by March, am I not still able to sell it for a full section 121 exclusion?
2. If I move in any later than March, it will have been a rental for more than 3 years and I think I’m SOL at that point as far as primary residence exclusion even if I move back into it, no?

IRS example: https://taxmap.irs.gov/taxmap/pub17/p17-084.htm

Example 1.(p116)

On May 24, 2011, Amy, who is single for all years in this example, bought a house. She moved in on that date and lived in it until May 31, 2013, when she moved out of the house and put it up for rent. The house was rented from June 1, 2013, to March 31, 2015. Amy claimed depreciation deductions in 2013 through 2015 totaling $10,000. Amy moved back into the house on April 1, 2015, and lived there until she sold it on January 28, 2017, for a gain of $200,000. During the 5-year period ending on the date of the sale (January 29, 2012–January 28, 2017), Amy owned and lived in the house for more than 2 years as shown in the following table.

Five-Year  Period	Used as   Home	Used as   Rental
1/29/12 – 5/31/13	16 months
6/1/13 – 3/31/15		22 months
4/1/15 – 1/28/17	21 months
	37 months	22 months

Next, Amy must figure how much of her gain is allocated to nonqualified use and how much is allocated to qualified use. During the period Amy owned the house (2,076 days), her period of nonqualified use was 669 days. Amy divides 669 by 2,076 and obtains a decimal (rounded to at least three decimal places) of 0.322. To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0.322. Because the gain attributable to periods of nonqualified use is $61,180, Amy can exclude $128,820 of her gain.

[Ashish Acharya]

Originally posted by @Jack B.:

I don’t think I would, but for some reason the IRS’ web sites example claims that I would, despite it conflicting with several CPA articles that I've read that state otherwise. I thought that as long as I lived in the house for 2 of the last 5 years before the sale, especially if I lived it in first, that the gains fall under the section 121 exclusion except for depreciation recapture?

My Situation:

Bought this house August 15th, 2014 and lived in it until end of February 2016 at which point I listed it for rent and it eventually rented it out in late April 2016.

I’ve had it rented from April 2016 (but listed as a rental from March 2016) until now, so just one month under 3 years of having it LISTED as a rental, or 2.5 months short of actual occupancy with a tenant (irrelevant since it was listed as a rental March 1st 2016 as I understand it). 

I am considering moving back into the house in March 2019, live in it for 1 year, then sell. The reason I want to live in it for a year is because I just used my section 121 primary residence exclusion in April 2018 so I will have to wait a bit to use it again.

Questions:

1. If I move back into it by March, am I not still able to sell it for a full section 121 exclusion?
2. If I move in any later than March, it will have been a rental for more than 3 years and I think I’m SOL at that point as far as primary residence exclusion even if I move back into it, no?

IRS example: https://taxmap.irs.gov/taxmap/pub17/p17-084.htm

Example 1.(p116)

On May 24, 2011, Amy, who is single for all years in this example, bought a house. She moved in on that date and lived in it until May 31, 2013, when she moved out of the house and put it up for rent. The house was rented from June 1, 2013, to March 31, 2015. Amy claimed depreciation deductions in 2013 through 2015 totaling $10,000. Amy moved back into the house on April 1, 2015, and lived there until she sold it on January 28, 2017, for a gain of $200,000. During the 5-year period ending on the date of the sale (January 29, 2012–January 28, 2017), Amy owned and lived in the house for more than 2 years as shown in the following table.

Five-Year  Period	Used as   Home	Used as   Rental
1/29/12 – 5/31/13	16 months
6/1/13 – 3/31/15		22 months
4/1/15 – 1/28/17	21 months
	37 months	22 months

Next, Amy must figure how much of her gain is allocated to nonqualified use and how much is allocated to qualified use. During the period Amy owned the house (2,076 days), her period of nonqualified use was 669 days. Amy divides 669 by 2,076 and obtains a decimal (rounded to at least three decimal places) of 0.322. To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0.322. Because the gain attributable to periods of nonqualified use is $61,180, Amy can exclude $128,820 of her gain.

 You have two issues going on. 

1) you need to be able to use sec 121 exclusion only if you have not used it in the last two years. Since you used it on April 2018, you have to wait until March 2020 to qualify for the gain exclusion.

So even if you wait until march 2020, you will not qualify for the exclusion since you will have not lived in the property for last 2 years out if 5 years. So you have to stay little longer to qualify the 2 years requirement. 

If you do that you will qualify for the exclusion.However see below regarding how much you can exclude.

2) You will not be able to exclude all the gains from this transaction as you have a non-qualifying use before your moved in again.

If you sell this property on March 2021, you will have lived in this property for around five years as a primary residence and would have rented this place for three years. So 38% of the gain will not qualify for the exclusive.

On top of that you will have the depreciation recapture.