Does 2yr out of 5 yr rule apply when rental home is converted to primary residence?

[singh]

My client bought a house in January 2015 and immediately gave on rent. The house was on rent from 2015 to end of 2019. The client moved into this house on January 1st 2020. So this house was his primary/principal residence from January 2020 to February 2022 when he sold it. The escrow and realtor documents show the house sold as primary/principal residence.

I wanted to know if he qualifies 'home sale exclusion' capital gains (exclusion). Does 2 out of 5 year rule apply in this situation.

His profit was $169,500.

Your help will be appreciated.

[Just-Lisa-Now-]

yes it would BUT I think youve got some non-qualified use during that 5 years when it was a rental, so they may not be eligible for the entire exclusion. 

You may want to go digging for more info about non-qualified use and how it relates to the 121 exclusion, I know the Home Sale Worksheet does have a section for computing it.

[IRonMaN]

You are going to end up recognizing some gain for the recapture of depreciation that you took while it was a rental.

[TaxGuyBill]

As Lisa said, there is "Nonqualified Use". Using ROUGH numbers, he owned the property for 7 years, but only used it as his Principal Residence for 2 years.  In this specific situation, that means he can excluded approximately 2/7th's of the profit.  He will pay tax on the other 5/7th's of the profit, plus pay tax on the gain due to the depreciation.

[Accountant-Man]

What Tax Guy Bill said.

[taxes96786]

See Pub 17 or Sale of Home pub for details