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TaxRobin, Tax Preparer
Category: Capital Gains and Losses
Satisfied Customers: 13159
Experience:  15+ years in Tax preparartion as well as Instructor for tax law, theory, and application
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Here is my situation I am trying to determine my tax

Customer Question

Here is my situation I am trying to determine my tax liability for:
- my wife and I bought a condo in May 2013
- moved for a work relocation (50+ miles away) in May 2014
- instead of selling at the time, decided to rent out to wait for better market conditions
- rented out for 2 years; August 2014-August 2016. Reported rental income/expenses/depr
- sold for a considerable capital gain in August 2016
My questions are:
- I know I do not meet residency requirement, however I moved for a work related relocation; do I qualify for partial exclusion even though I am selling 2 years later and have rented property out for those 2 years?
- If so, how do I calculate my exclusion?
- How would I report this on my taxes since technically IRS thinks I have a rental property? Do I report it in the section of selling my investment assets or do I report it in a typical home sale section (or are these the same?)
Submitted: 2 months ago.
Category: Capital Gains and Losses
Expert:  TaxRobin replied 2 months ago.


Because you had to move for work then yes, you can claim a partial exclusion. IRC 121 does allow a partial exclusion but not on the nonqualified use time (the rental portion of time).

You have to report the sell using form 4797. You would claim a partial exclusion on the Schedule D after you calculate your gain.

The IRS provides a worksheet for computing a partial exclusion in Pub. 523, Selling Your Home. What you do is prorate the exclusion based on just the 12 months you did live there.

Customer: replied 2 months ago.
Thank you...I feel comfortable now I can take the partial exclusion. I am still confused on the how much is that, even after I have fully filled out the worksheet you suggested. Without going into specific details:After all my independent research I thought it was as simple as prorating. However, the end of the worksheet requires me to put in 2 numbers: gain eligible for exclusion and exclusion limit. My exclusion limit is big...prorating the $500k married limit by 50% which takes the 365 days I lived there divided by the 730 which it says to do. However the "gain eligible for exclusion" that I calculated is small since that makes me subtract my gain by my non residence gain, and my non residence gain is a big portion since I only lived there 1 of the 3 years. This brings my exclusion to $35k instead of the 250k exclusion limt (500 married limit x 50%).It says at the end of the worksheet to take the smaller of the 2 which is obviously $35k; this is my exclusion? My total cap gain is around $140k so would that mean I have to pay taxes on 105k (140-35?). Or can I take the prorated 500k which would be a 250k exclusion in which case all my capital gain is excluded?
Expert:  TaxRobin replied 2 months ago.

Yes, your exclusion is the smaller number. The gain that you realize for the rental use time is not allowed for the exclusion plus none of the exclusion you are allowed will be available to reduce the Recapture of Depreciation. So the depreciation you claimed (or could have claimed for rental use) is taxed too.

You cannot prorate based on the full exclusion amount.

The worksheet is correct.

I know you would like to be able to claim more but it is based on the actual time you used it.

You are most welcome.
A positive rating is appreciated so I get credit for the response.

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