If I move BACK INTO a rental, does the 2/5 year rule apply?

[Jack B.]

I bought the house in 2013 and lived in it for 1.5 years. I moved out and rented the house out for 3.5 years. I just moved back into the house. If I go to sell it in 2-4 years, will any portion of the property sale be allocated to rental use or does the 2/5 year use test apply here since I lived in the house before I turned it into a rental?

[Ashish Acharya]

Originally posted by @Dave Foster:

@Linda Weygant Oh CPA Jedi - Will @Jack B.have any issue with "non-qualifying use"?  I know he'll still have to recap depreciation taken but I thought he would also only get the proration for qualified use as a primary.  

 Actually,

If he moves back, he is subject to non qualified use and, capital gain exclusion does not apply to the time preiod that is non qualified.

If the rental period was after moving out of primary residence, there is no non qualified use, 

Since you moved in after the house was rental, there is something called Periods of Nonqualified Use. Gain on the nonqualified use are not excludable under that 500k exclusion.

Simple example

You bought a rental home on January 1, 2012, for $200,000. On January 1, 2015, you converts the property into your principal residence, where you live until you sell the home on January 1, 2018, for $350,000. Your total ownership period is six years (2012-2017). However, the years 2012-2014 are a period of nonqualified use since the home was not principal residence during those years

Period of nonqualified use	3 years
Total ownership period	6 years
Total gain	($350,000 − $200,000)	$150,000
Nonexcludable gain	(3/6 × $150,000)	75,000

You must report a $75,000 gain for non-qualified use.

The remaining $75,000 ($150,000 − $75,000) of gain can be excluded under 500k exclusion because you meet the two-year ownership and use tests for the home and has not excluded another gain in the previous two years. 

You have to recapture depreciation too.