Sec 121 Exclusion for investment property used previously as main home?

[ejdtaxman]

A client sold an investment property in 2021. There is a moderate gain. 

Come to find out, he lived in the property from 2014 until 2018. Theoretically this should qualify him for the main home exclusion or at least a partial exclusion?

This was a rental after he moved out so it is an asset on schedule E. So normally I would just send it to 4797 but I have no idea how to split that with the home sale worksheet which is where I would normally generate the exclusion. 

Is there any way to do this? 

[TaxGuyBill]

Count the days for the last 5 years ... did the taxpayer use it as their Principal Residence for 2 years (730 days)?

If so, the way ProSeries wants you to do it is to 'link' the Asset Entry Worksheet to the Home Sale Worksheet, and report the sale using the Home Sale worksheet. 

ProSeries will incorrectly put the sale on 8949/Schedule D rather than 4797, but the end tax result should be the same.  If you want it to properly show up on the 4797, you could probably enter the exclusion in the worksheet on the top of the 4797 (enter it as sale of property, showing a loss of the exclusion amount).

[ejdtaxman]

The end result is far from the same. It is costing him an extra 3k on the federal alone. Part of the reason seems to be that it affects his accumulated losses but that is only a 5k difference. I can't trace the remainder but I will try later when I am a little more focused. 

If you have any additional suggestions please let me know. 

[TaxGuyBill]

I'm wondering if you are entering something wrong. As far as I can think of, it will be the same.

[ejdtaxman]

The entry was correct initially and I didn't change anything except link it to home sale worksheet. 

I don't know what else could change it. I think I will call intuit support line tomorrow and hope for the best. 

[rbynaker]

It shouldn't have an impact on accumulated losses (unless maybe it was a vacation home).  Did you check the box on the Sch E Wks that the activity was disposed of?  That should release any PALs.

[BobKamman]

@TaxGuyBill   The 4797 instructions say, " On Part I, line 2, enter “Section 121 exclusion,” and enter the amount of the exclusion as a (loss) in column (g)."  

IRS is more opaque than usual on instructions for how to report sale of a home that was also rented for some of the five-year period considered.  

[ejdtaxman]

Yes. complete taxable dispo is checked off. 

I think maybe I have fixed on something. When reporting the sale and linking it to the home sale worksheet, the exclusion carries over to part 1, as @BobKamman said. However, the sale is being reported on Part 3. 

it is definitely affecting his loss because the amount on schedule 1 is going from negative 90k to roughly negative 64k.