Cap Gains on a personal residence turned rental

6 Replies

Hi there.  I had a quick question about selling a property.

We lived in our residence for 5 years, then because of a new job had to move away.  In our absence we rented the house out for the past 2 years.  So over the past 5 yrs we met the criteria of living in the home for at least 2 yrs.  Our tax preparer has told us that the 2 yrs must be the last 2 yrs, so the exception does not apply to us.  This is inconsistent with my understanding.  Any assistance is greatly appreciated.

I always thought it has to be any two years out of the past 5 year history. I assume you will be fine, but wait around for someone to give better advice.

Either you misunderstood, or your cpa is clueless.
Yes, you qualify, as long as you sell/close within 3 years of moving out.
If you bought as a rental initially, then moved in for the Last 2 years as your cpa suggests, you would actually only get a partial exemption, Non Qualified Use.

@Paul Hom

You are correct in your understanding and your preparer is wrong (unless there is other info we're missing here). The rule is "2 of the last 5", and it doesn't need to be consecutive and doesn't need to be the previous 2 to qualify. For instance you could live in the home in year 1, move out for years 2 & 3, move back in for year 4, move out for year 5 and still qualify for the exclusion.

If your tax preparer continues to argue about this just do a google search for "Topic 701 IRS". This spells out very clearly that it DOES NOT need to be the last 2 years.

Hope this helps! 

I’d double check with your tax preparer to make sure you didn’t just misunderstand the first time around.

If he’s still saying the same thing, I’d highly recommend getting a different tax preparer. Not to be mean, but if he’s still mistaken then he clearly is lacking knowledge in certain parts of the business, particularly in regards to real estate, which is what you’re doing.

It begs the question, what else is he lacking knowledge on? If you’re going to continue to invest in real estate, you need someone who understands those aspects of the law.