Hi and welcome to our site!
First of all - we need to separate repairs and improvements.
See page 12 in this publication
These add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and improvements to the basis of your property.
I hope that reference will help to convince your tax consultant.
When you rented the property - you deducted depreciation - correct?
Depreciation is an income tax deduction
that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance
for the wear and tear, deterioration, or obsolescence of the property.
So when the property is sold and if there is a gain - a part of that gain is attributed to the depreciation recapture - means that amount previously deducted is added back to your income.
That is correct - the sale transaction
is reported in the year of sale.
However - when sold on installments
- a part of payments is allocated to interest
- which is taxed as interest income in the year received.
Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received. Use Form
6252 (PDF), Installment Sale Income, to report an installment sale in the year the sale occurs and for each year you receive an installment payment. You will need to file Form 1040
(PDF), U.S. Individual
Income Tax Return
, and may need to attach Form 4797 (PDF) and Form 1040, Schedule D
You report interest on an installment sale as ordinary income
in the same manner as any other interest income. If the installment sales contract does not provide for adequate stated interest, part of the stated principal may be recharacterized as "imputed" interest or as interest under the original issue discount rules
, even if you have a loss. You must use the applicable federal rate
(AFR) to figure the unstated interest on the sale. The rates are published monthly in the Internal Revenue Bulletins on IRS.gov.
Regarding "medical exemption" ...
That may be used when the main home is sold and you owned or lived in the home less than two years.
If you rented your home less than three years - you might qualify for the exclusion without any exemption.
When you are selling rental property
- that exemption may not be used.
For details - see page 4
Does Your Home Qualify—Details and Exceptions
Partial Exclusion May Be Available
Health-related move. You meet the standard requirements if any of the following happened during the time you owned and lived in the home you sold:
Let me know if you need any help.