Capital gains exclusion 2 year rule

7 Replies

if I were to purchase a property as a primary residence, reside in it for 2 years, then rent it out for 2 additional years and sell it at the end... 

Will I still be exempt from capital gains up to $250k single/$500k joint filer, or does that get "wiped out" after it became a "business?"

Assuming no other exclusions from capital gains within that time frame.

Yes. You can read it yourself, IRS section 121.  It must be your primary "at least 2 of the last 5 years, on the date of the sale".

@Ben Pohle , It's a 5 year look back so you could actually live in it for 2 and then rent it for 3 and still claim the primary residence exemption (be very careful to match dates).  And you will have to pay  the depreciation recapture during the time it was a rental.

And don't forget your basis in the property for depreciation purposes would be the market price of the property at conversion, not the price you paid for it.  

It's actually the lower of your adjusted tax basis, or the current FMV of the home at time of conversion.

Can you guys elaborate on paying back the depreciation and FMV?

So your Basis for how much to depreciate once it's a rental will be either the lower of: 

What you paid + any capital improvements OR the FMV at the time you make it a rental

If you have a basis of 100k at time of becoming a rental- houses are depreciated over 27.5 years 

So $3,600ish a year in depreciation for 3 years it's a rental

Well you got that as a expense deduction for the years it was a rental, and basically when you sell you have to pay it back. 

So if you sold it for $150k you'd basically have no tax on the gain, you would pay 25% recapture tax on the $10,800 of depreciation though. 

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