Just need confirmation on Primary Home Capital Gains Exclusion

[Justin Summers]

Okay. I think I have this right but Since I'm dealing with a lot of money Just wanted confirmation. Because it's a lot of money. 

I moved into my house as my primary residence and lived there from June 1st  2015 through June 2018  -  (3 years as Primary)

I moved out and rented out the house from June 2018 through February 2021.   (2 years 8 months as a rental) 

I decided to sell the house in Feb 2021 knowing that I only had 4 more months as a rental before losing my Capital gains exclusion

I put the house on the market for sale and MOVED back into it as my primary Home Feb 1st 2021.  ( 4 months as primary So far in 2021)

The house has not sold yet

But by moving back into it I have basically stopped the ticking clock that was pressuring me to Sell it and claim the Cap gains exclusion, right?   Basically my new Primary residence time in the house for 2021 (Currently 4 months) Gets added to my Prior primary residence time in 2017 and 2018.  

 Meaning as long as I live in the property as my primary until it sells I'm okay with my 2 of the last 5 years rule.. Hope this makes sense. 

Justin

PRIMARY	June 1 2015 to June 1 2018		3 years
Rental	June 1 2018 to Feb 2021		2 years 7 months.
PRIMARY	feb - June 2021		4 months

[Michael Plaks]

@Wayne Brooks

Not entirely correct. One can meet 24 mos at any time during the 5-yr lookback period, and not even continuous 24 mos. This is step 1 which opens the door to the exclusion.

Then there's step 2: nonqualified use leading to prorated, i.e. reduced, exclusion. If the property was used other than as a residence, aka a rental, you don't get the full exclusion and must prorate it.

Finally, there is an exception: if you moved out and never moved back in, then Step 2 is disregarded. This is a very common scenario: move out, rent it for under 3 years, and then sell it tax-free with full exemption (except for depreciation recapture). 

Once you move back, which is what @Justin Summers unfortunately did, you cannot use the exception and must prorate.

Here is why the proration was inserted in the law. Without it, we could let a rental property appreciate fivefold, then move into it for 2 years - and, voila, no taxes! Congress wanted to close this loophole specifically, hence the non-qualified use proration. But since they did not want to punish people who moved out and did not immediately sell, they created an exception. The key for the exception is to NOT move back.