Sold AirBnb Lived in it for 2 year then rented it for 2 years Taxes?

[yeknod]

TP lived in the house for 2 years then did Airbnb for 2 1/2 years.  Can the main home sale exclusion be taken? 

Does the depreciation need to be recaptured?  

Thanks,

[Just-Lisa-Now-]

You may have some unqualified use to consider, yes depreciation will need to be recaptured, work through the Homesale worksheet, you can link it to the Asset Worksheet.

[TaxGuyBill]

I'm going to nit-pick some things because of the way you phrased things:

1. Was it their "Principal Residence" while they lived in it?
2. Was it their Principal Residence from the time they bought the home until they converted to to rental use?
3. Was it AT LEAST two years (if they merely say "two years", you should get the actual dates)?

If the property was sold at a gain, yes, they will have "Unrecaptured Section 1250 Gain" due to the depreciation that was able to be taken.

[Just-Lisa-Now-]

Bill, does unqualified use some into play in this scenario?  I struggle with this concept, when does it apply and when doesnt it?

[TaxGuyBill]

No.  If it was never their Principal Residence AFTER it was their non-principal residence, Nonqualified Use does not apply.  Or to phrase it another way, if during their ownership the only time  it was a non-principal residence was at the 'end' of their ownership, just treat it as normal (Nonqualified Use does not apply).

That is one of the reasons I asked if it was their Principal Residence from when they bought the home until it was converted to a rental (to check if it was ever NOT their Principal Residence, other than at the 'end').

Does that make sense?

[EDIT:  The purpose of it was to prevent people from having a rental property then moving into it for two years to exclude all of the gain (besides the gain due to depreciation).  That is why making it their Principal Residence AFTER triggers the Nonqualified Use.]

If it was their Principal Residence AFTER it was their non-principal residence, Nonqualified Use may apply.  However, Military (up to 10 years) and Temporary Absences (up to 2 years) are also ways to get 'out' of Nonqualified Use, but are less common.

[Just-Lisa-Now-]

thank you!

I have people with long term rentals that think they can move in for 2 years and sell and get the full exclusion, Ive been telling them they need to be there the full 5 years for that plan to work, so I AM giving correct advice.

[rbynaker]

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@Just-Lisa-Now- wrote:

thank you!

I have people with long term rentals that think they can move in for 2 years and sell and get the full exclusion, Ive been telling them they need to be there the full 5 years for that plan to work, so I AM giving correct advice.

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No, they needed to have moved in before 1/1/2009 to exclude all of the gain (or as Bill said, not move back in at all and still meet the 2-out-of-5 year rule).  Otherwise there will be a period of non-qualified use resulting in a prorated gain.

Rick

[TaxGuyBill]

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@Just-Lisa-Now- wrote:

they need to be there the full 5 years for that plan to work, so I AM giving correct advice.

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If I remember correctly, the faulty Publication 523 seems to indicate that five years would do it (and I've seen a lot of tax professionals with that same idea), but as Rick said, Nonqualified Use would still apply even if they moved back in to it for five years.

[qbteachmt]

Okay, someone has to do it:

2 years + 2 1/2 years doesn't = 5 years ownership.

[TaxGuyBill]

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@qbteachmt wrote:

Okay, someone has to do it:

2 years + 2 1/2 years doesn't = 5 years ownership.

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Huh?  The OP never said anything about five years of ownership nor does five years of ownership have anything to do with the exclusion.

If you are referencing Lisa's comment about five years, that has nothing to do with the OP's 2 years plus 2.5 years.

[Just-Lisa-Now-]

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@TaxGuyBill wrote:

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@Just-Lisa-Now- wrote:

they need to be there the full 5 years for that plan to work, so I AM giving correct advice.

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If I remember correctly, the faulty Publication 523 seems to indicate that five years would do it (and I've seen a lot of tax professionals with that same idea), but as Rick said, Nonqualified Use would still apply even if they moved back in to it for five 

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But they wouldnt have any nonqualified use in that 5 year period if they lived there the straight 5 years prior to the sale.(Im not counting if they lived there before it was a rental).

Once the renters are gone, they have to live there another 5 years

[TaxGuyBill]

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@Just-Lisa-Now- wrote:

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But they wouldnt have any nonqualified use in that 5 year period if they lived there the straight 5 years prior to the sale.

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They wouldn't have any Nonqualifed Use in that 5 year period, but that doesn't matter.  Nonqualified Use is for any time a taxpayer owned the property and it was not their Principal Residence after 2008.  Not having any within five years does not eliminate the taxable repercussions of Nonqualified Use before five years.

[Terry53029]

Just fyi, The Housing and Economic Recovery Act of 2008 amends Section 121 of the Internal Revenue Code.  Section 121 no longer permits homeowners to take the full tax-free exclusion on the sale of real property that was held and used as their primary residence if there was any non-qualified use of the real property prior to it being held and used as their primary residence. The capital gain resulting from the sale of the property will be allocated between qualified and non-qualified use periods based upon the amount of time the property was held and used for qualified versus non-qualified use.

[yeknod]

Lisa, thanks so much that really helped letting me know the home sales could be linked to the Dispositions portion of the asset.

Don

[Terry53029]

@Just-Lisa-Now- The allocation of the gain between qualified and non-qualified use periods is actually very simple.  Gain is allocated using a formula or fraction based on the number of years the property was held for qualified use versus the number of years the property was held for non-qualified use as a percentage of the total number of years the property was owned by the homeowner. Here is an example:

A homeowner owned real property for ten (10) years.  It was held as rental property for the first eight (8) years and then converted to their primary residence for the last two (2) years.  The non-qualified use period is eight (8) years and the qualified use period is two (2) years.

In this example, 2/10ths of the total actual capital gain can be excluded from taxable income as qualified use under Section 121 and 8/10ths of the actual total capital gain must be included (not excluded) in the homeowner’s taxable income as non-qualified use under Section 121.

[Accountant-Man]

The same rules apply for the exclusion: did they own it and reside in it for 24 months within the last 60 months before sale. None of the months need to be consecutive.

DID THEY QUALIFY?

IE., bought and lived in it Jan 1, 2019 through December 31, 2020. 24 MONTHS

Moved out and rented it out Jan 1, 2021 through Jun 30, 2023. 30 MONTHS. Sold it July 1, 2023.

Owned it for 54 months.

DID THEY QUALIFY?

[Just-Lisa-Now-]

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@Accountant-Man wrote:

The same rules apply for the exclusion: did they own it and reside in it for 24 months within the last 60 months before sale. None of the months need to be consecutive.

DID THEY QUALIFY?

IE., bought and lived in it Jan 1, 2019 through December 31, 2020. 24 MONTHS

Moved out and rented it out Jan 1, 2021 through Jun 30, 2023. 30 MONTHS. Sold it July 1, 2023.

Owned it for 54 months.

DID THEY QUALIFY?

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Yes, they owned and lived in it 24 months.   My old employer had a guy back, he was a contractor.  He'd buy a fixer upper, .live in it and fix it up and sell it right around the 3 year mark, got to use his exclusion each time since hed owned and lived in it for the 24 months.