2 out of 5 rule and qualified vs non qualified use

[Amit Chawla]

Purchased a primary residence in March 2017 and lived in it until Jan 2020, then rented it out until May 2022 and sold in June 2022.  We owned this residence for just over 5 years and lived in it for at least  out of the last 5 years.  I have not taken the exclusion before, so this would be my first time.

My CPA is saying that since it was rented for some of that 5 year portion, that ends up being non-qualified use and must be broken down in order to see how much of the capital gains is excluded.  CPA is saying that since it was rented roughly 48% of my total ownership that 48% of the gain is taxable.

Can someone please explain to me what is considered qualified use vs non-qualified?  When would each come into play?  The total gain on the house is below $250k so I don't seem to be going over any limits. 

Any tips or clarification would be helpful.

[Natalie Kolodij]

Quote from @Amit Chawla:

Purchased a primary residence in March 2017 and lived in it until Jan 2020, then rented it out until May 2022 and sold in June 2022.  We owned this residence for just over 5 years and lived in it for at least  out of the last 5 years.  I have not taken the exclusion before, so this would be my first time.

My CPA is saying that since it was rented for some of that 5 year portion, that ends up being non-qualified use and must be broken down in order to see how much of the capital gains is excluded.  CPA is saying that since it was rented roughly 48% of my total ownership that 48% of the gain is taxable.

Can someone please explain to me what is considered qualified use vs non-qualified?  When would each come into play?  The total gain on the house is below $250k so I don't seem to be going over any limits. 

Any tips or clarification would be helpful.

 This is the second time I've seen this wong information posted this week. 

Nonqualified use ONLY happens if it was rented FIRST and then converted to a primary. It prevents you from owning a rental for like 20 years then moving into it for 2 to be able to sell it tax-free. 

But if you OWNED it first, then rented it for up to 3 years it is still fully tax-free under IRC 121. 

The only gain you'll have is depreciation recapture. 

Find a new tax professional if they don't clearly understand this. This isn't a complex RE specific tax item, this is something all tax pros see multiple times a year.