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Reporting the Sale of Home Used as a Rental Property - Nonqualified Section 121 Exclusion

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Reporting the Sale of Home Used as a Rental Property - Nonqualified Section 121 Exclusion

Problem Description

How do I report the sale of a home that was used as a rental property that had been rented in the year of the sale, and the taxpayer had lived in the home for at least 2 of the last 5 years?

Solution Description

If the asset is entered on Screen 22, Depreciation:

  1. Go to Screen 22, Depreciation.
  2. Select the applicable Asset from the left navigation panel.
  3. Scroll down to the General Disposition Information section.
  4. Enter the date of sale in, Date sold, disposed, or retired (MANDATORY).
  5. Enter the Basis adjustment (land, etc.) [A]. (if applicable)
  6. Enter any Expenses of sale or exchange. (if applicable)
  7. Scroll down to the Sale of Asset (4797/6252) section.
  8. Enter the Sales price (-1=none).
  9. Scroll down to the Sale of Home section.
  10. Check the box, Sale of home (MANDATORY to compute exclusion).
  11. Check the box, 2-year use test met (full exclusion) (If the taxpayer owned and used the home as a main home for 2 or more years during the 5-year period ending on the date of the sale or exchange of the property. An entry in this field tells the program that the taxpayer qualifies for the full $250,000 exclusion ($500,000 is MFJ).
  12. Enter the Number of nonqualified use days after December 31, 2008.Note:  The Housing Assistance Tax Act of 2008 included a provision that disallows the Section 121 exclusion for periods of nonqualified use. Nonqualified use is generally any period after December 31, 2008 during which the home was not used as a principal residence of the taxpayer or spouse. This would include time that the home was used as a rental property or used as a vacation home.  The ratio of nonqualified use to the period of ownership is multiplied by the gain of the sale that is otherwise eligible for the exclusion (so the gain less any post May 6, 1997 depreciation) to determine the amount of gain allocated to nonqualified use. This portion of gain allocated to nonqualified use is not eligible for the Section 121 exclusion.  For additional information, refer to IRS Publication 523 and the Sale of Home - Gain (or Loss), Exclusion, and Taxable Gain Worksheet.
If the asset is not already entered on Screen 22, Depreciation:
  1. Go to Screen 17, Dispositions.
  2. Complete the applicable information about this sale:
    1. Description of property
    2. Date acquired
    3. Date sold
    4. Cost or basis
    5. Expense of sale
  3. Scroll down to the Form 4797 section.
  4. Enter any prior depreciation in, Depreciation allowed (-1=none, triggers 4797).
  5. Enter the Recapture amount (if not section 1245). (if applicable)
  6. Enter a 1 in, Blank = 1245, 1=1250, 2=1252, 3=1254, 4=1255. (if applicable)
  7. Scroll down to the Sale of Home section.
  8. Check the box, Sale of home (MANDATORY to compute exclusion).
  9. Check the box, 2-year use test met (full exclusion) (If the taxpayer owned and used the home as a main home for 2 or more years during the 5-year period ending on the date of the sale or exchange of the property. An entry in this field tells the program that the taxpayer qualifies for the full $250,000 exclusion ($500,000 is MFJ).
  10. Check the box, Business use in year of sale. (if applicable)
  11. Enter the Number of nonqualified use days after December 31, 2008.Note:  The Housing Assistance Tax Act of 2008 included a provision that disallows the Section 121 exclusion for periods of nonqualified use. Nonqualified use is generally any period after December 31, 2008 during which the home was not used as a principal residence of the taxpayer or spouse. This would include time that the home was used as a rental property or used as a vacation home.  The ratio of nonqualified use to the period of ownership is multiplied by the gain of the sale that is otherwise eligible for the exclusion (so the gain less any post May 6, 1997 depreciation) to determine the amount of gain allocated to nonqualified use. This portion of gain allocated to nonqualified use is not eligible for the Section 121 exclusion.  For additional information, refer to IRS Publication 523 and the Sale of Home - Gain (or Loss), Exclusion, and Taxable Gain Worksheet.

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